## _gmr ## Source details **Canonical URL:** [_gmr](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/gmr/2009/eng/_gmr.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/gmr/2009/eng/_gmr.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/gmr/2009/eng/_gmr.pdf.json) --- ### Foreword — nature, channels, and human consequences - Report title: “A Development Emergency.” - Crisis described as the most severe in over 70 years; "the financial crisis that grew into an economic crisis is now becoming an unemployment crisis, and 'risks becoming a human and social crisis—with political implications.'" - No region is immune; poor countries "have much less cushion to withstand events." - Transmission channels to developing countries: reductions in export volumes, commodity prices, remittances, tourism, foreign direct investment, and possibly even foreign aid. - Private capital flows to the developing world are seeing their sharpest decline in many decades; net flows likely turning negative in 2009—a "more than $700 billion drop from the peak in 2007." - Global estimates of human impacts: - "More than 50 million additional people living in extreme poverty in 2009 than expected before the crisis." - "About 200,000 to 400,000 more babies may die each year" (impact of slowed growth). - MDG prospect: "already a cause for serious concern, now looks even more distant." ### Crisis impacts on developing-country growth, trade, and capital flows - Growth projections and regional impacts: - "For developing countries as a whole, growth is now projected to fall to 1.6 percent in 2009, from an average of 8.1 percent in 2006–07." - "Growth in Sub-Saharan Africa is projected to slow to 1.7 percent in 2009, from 6.7 percent in 2006–07." - "Countries in Eastern Europe and Central Asia with weaker macroeconomic fundamentals ... average growth in the region in 2009 now projected to be negative." - "Average projected GDP growth in developing countries in 2009 is now only about a quarter of what was expected before the financial turmoil intensified and a fifth of that achieved up to 2007." - Global and regional GDP (selected World Economic Outlook April 2009 baseline): - World output: 2008 = 3.2; 2009 = –1.3; 2010 = 1.9 - Advanced Economies: 2008 = 0.9; 2009 = –3.8; 2010 = 0.0 - United States: 2008 = 1.1; 2009 = –2.8; 2010 = 0.0 - Emerging markets and developing countries: 2008 = 6.1; 2009 = 1.6; 2010 = 4.0 - China: 2008 = 9.0; 2009 = 6.5; 2010 = 7.5 - India: 2008 = 7.3; 2009 = 4.5; 2010 = 5.6 - Private capital flows and financing gaps: - "Private capital flows to the developing world ... net flows likely turning negative in 2009." - Memorandum items: Private capital flows, net (2008) = 307 (US$ billions); (2009) = –82 (US$ billions). - Estimates of developing countries’ financing gap in 2009 "reach as high as $1 trillion." - Trade collapse and commodity prices: - World trade projected to register its largest decline in the post-war period; world trade volume projected to decline by 6.1 percent in 2009 (World Bank Global Economic Prospects, April 2009). - IMF commodity price index declined by 27 percent between November 2007 and November 2008; estimated to have contributed to an 11 percent drop in trade. ### Human consequences, poverty, and MDGs - Poverty and MDG impacts: - Food-price shock (2005–2008) pushed "around 200 million more people into extreme poverty; about half of them will remain trapped in poverty in 2009 even as food prices recede from their peaks." - Estimates of poverty impact of the growth slowdown range "from 55 million to 90 million more extreme poor in 2009 than expected before the crisis." - On current growth projections, "more than one-half of all developing countries could experience a rise in the number of extreme poor in 2009;" proportions higher among low-income countries ("two-thirds") and Sub-Saharan Africa ("three-quarters"). - Child and maternal health impacts: - "About 200,000 to 400,000 more infant deaths per year on average between 2009 and the MDG target year of 2015"—equivalent to "1.4 million to 2.8 million additional infant deaths during the period" (2009–2015). - Current human development shortfalls cited (MDG halfway point): - "Around 75 million children of primary school age were not in school." - "190,000 children under five died every week from preventable disease." - "10,000 women died every week from treatable complications of pregnancy." - "More than 2 million people died from AIDS annually, close to 2 million from tuberculosis, and about 1 million from malaria." - "Around 1 billion people suffered from hunger and twice as many were undernourished." - "About half of the developing world lacked access to basic sanitation." - Labor market effects: - ILO projects "some 30 million more people around the world may be unemployed in 2009, of whom 23 million could be in developing countries." - Worse-case scenario: "as many as 50 million more people becoming unemployed in 2009." - Labor-market impact estimated to be associated with "93 million additional people classified as extreme poor" (aggregate estimate referenced). ### Policy priorities and recommended actions (global and national) - Overarching principle: "A global crisis requires a global solution." - Three key global priorities (supporting developing countries): - Donors must deliver on their commitments to increase aid; "increased needs call for going beyond existing commitments." - National governments must "hold firm against rising protectionist pressures and maintain an open international trade and finance system"; completing the Doha negotiations "expeditiously would provide a much-needed boost in confidence." - Multilateral institutions must have "the mandate, resources, and instruments to support an effective global response," playing a key role in bridging financing gaps and reviving private flows. - Six priority areas for action (developing countries): - Ensure an adequate fiscal response to protect the poor and vulnerable and to support economic growth—priority areas: strengthen social safety nets and protect infrastructure programs that create jobs and build productivity; tailor fiscal responses consistent with macroeconomic stability. - Provide support for the private sector and improve climate for private investment—pay special attention to strengthening financial systems and SME access to finance for trade and investment. - Redouble efforts in human development and recover lost ground in progress toward the MDGs—strengthen key public programs for health and education and leverage private sector roles. - Scale up aid to poor and vulnerable countries hit hard by the crisis. - Maintain an open trade and finance system—including quick action on the Doha Round. - Ensure multilateral system has mandate, resources, and instruments for effective global response. - Country-level policy differentiation: - Countries with sound fundamentals: scope for monetary easing and discretionary fiscal policies where inflation is falling, fiscal balances are sustainable, reserves are strong, and external vulnerabilities are limited. - Countries with weak fundamentals and limited access to financing: may need fiscal consolidation, tighter monetary policy, exchange rate depreciation, and expenditure prioritization to protect core spending and social safety nets. ### Vulnerability Fund, aid scaling, and private giving - Vulnerability Fund proposal: - "0.7 percent of their stimulus packages, or about $15 billion based on the packages announced to date, in a Vulnerability Fund to help developing countries." - Purpose: support three crisis-response priorities in developing countries that lack resources: strengthening social safety nets; funding essential infrastructure investment; supporting financing for SMEs and microfinance institutions. - ODA trends and gaps: - ODA from DAC members rose by about 10 percent in real terms in 2008; net ODA from DAC donors in 2008 was about $29 billion short of the Gleneagles target of $130 billion per annum by 2010. - ODA to Sub-Saharan Africa was about $20 billion short of the 2010 target of $50 billion per annum. - Net ODA disbursements from DAC rose during 2003–05 but fell in 2006 and 2007 (0.33 percent of donors’ GNI in 2005 to 0.28 percent in 2007); ODA-to-GNI ratio increased to 0.30 percent in 2008. - Private international giving: - OECD estimate: $18.6 billion in 2007 (noted as widely considered an underestimate). - Alternative estimate: private international giving from the United States alone at $34.8 billion in 2006 (Hudson Institute estimate referenced elsewhere). - Gates Foundation commitments cited: "has committed over $11.6 billion since 1994 for global health programs;" international grants: $2 billion in 2006 and $2.4 billion in 2007. - Risks to aid: - Exchange-rate effects could depress aid value; aggregated exchange rate movements could "depress the value of aid by nearly $8 billion" with a rough estimate of aid wiped out by currency movements in 2009 at "$3 billion to $5 billion." - Historical precedent: deeper, longer donor recessions can produce large contractions in aid (examples: Finland, Norway, Sweden in the 1990s). ### IFI and MDB responses, instruments, and resource needs - IMF actions and resources: - G-20 agreed to support a tripling of resources available to the IMF to $750 billion; supported a general SDR allocation of $250 billion ($100 billion to emerging market and developing countries; $19 billion to low-income countries). - IMF established a new Flexible Credit Line (FCL); enhanced flexibility of SBAs; doubled access limits for emerging markets and low-income countries; reformed conditionality; plans to step up lending to low-income countries to around $3 billion a year over the next two years—"triple last year’s level." - IMF provided about "$49 billion since mid-2008" to nine emerging countries (selected figure). - MDB commitments and needs: - MDBs supported an increase in MDB lending of "$100 billion to a total of around $300 billion over the next three years"; support for a "200 percent general capital increase at the Asian Development Bank (ADB)" and reviews for other MDB capital needs. - World Bank Group crisis facilities and components: - Vulnerability Financing Facility (VFF) umbrella including the Global Food Crisis Response Program and Rapid Social Response Fund. - Infrastructure Recovery and Assets Platform (INFRA). - IFC Private Sector Platform (Bank Recap, Trade Finance, Infrastructure Facility, Microfinance Facility, Advisory Facility). - World Bank Crisis Response Program committed "$856 million for 29 countries, including $325 million for African countries." - IDA provided "$4.1 billion in new commitments of concessional financing in the second half of 2008." - IDA Fast-Track Facility aims to fast-track "up to $2 billion" of financial assistance. - MDB lending volumes and leverage: - MDB gross disbursements in 2008: $55.1 billion (up from $48.7 billion in 2007). - Of $55.1 billion, $42.5 billion was nonconcessional resources; gross concessional flows rose by only 3.5 percent to about $12.5 billion. - Total MDB lending expected to rise to an annual average of "as much as $100 billion" in the next three years (projection cited). - Trade finance interventions: - G-20 agreement: ensure availability of at least "$250 billion of trade finance over the next two years" through export credit/investment agencies and through MDBs. - IFC action: up to "$50 billion of trade liquidity support over the next three years" through the new Global Trade Liquidity Pool. - IFC Global Trade Finance Program doubled from "$1.5 billion to $3.0 billion"; guarantees with average duration of six months support up to "$18 billion of trade finance over the next three years." - IFC program performance since inception (September 2005): "$3.2 billion in trade guarantees have been issued"; "2,600 transactions supported"; "48 percent were for banks in Africa"; "70 percent involved small and medium enterprises"; "50 percent supported trade with the world’s poorest countries"; "35 percent facilitated trade between emerging markets." ### Trade policies, trade facilitation, and protectionism risks - Trade policy and Doha: - Completing the Doha Round is urged as a priority to maintain open markets and boost confidence; a December 2008 draft package outlined substantial tariff and subsidy cuts (figures and modalities summarized in chapter). - Trade finance and tightening: - Structured medium- and long-term trade finance instruments contracted by "about 40 percent in the last quarter of 2008 compared with 2007" (Dealogic). - Trade finance pricing rose sharply: trade finance deals offered at "300 – 400 basis points over interbank refinance rates" by end-2008—two to three times a year earlier. - Cost of LCs "reported to have doubled or tripled" for buyers in several emerging countries. - Protectionism indicators: - Antidumping initiations increased by "31 percent" in 2008; application of new antidumping measures rose by "19 percent"; developing countries accounted for "73 percent" of all new investigations in 2008. - G-20 commitments: refrain from raising new barriers to investment or trade, imposing new export restrictions, or implementing WTO-inconsistent measures; reaffirmed and extended to end-2010. ### Infrastructure, private sector, and investment climate - Infrastructure needs and gaps: - Developing countries require "around $900 billion each year (7–9 percent of their GDP) both to maintain existing infrastructure and to undertake new projects," yet "only half of the required amount is actually spent." - Sub- Saharan Africa infrastructure financing gap: about "$40 billion annually"; improved management and cost recovery could reduce this gap "by as much as 45 percent." - Africa catch-up examples: raising services to Mauritius levels could add "2.2 percentage points to per capita growth"; catching up to Republic of Korea would raise per capita growth by "up to 2.6 percent percentage points per year." - Private participation and results: - Private investment peaked ~$140 billion in 1997; in 2000–05 governments/state-owned enterprises provided 70 percent of infrastructure finance, private sector 22 percent, ODA 8 percent. - For projects reaching financial closure 1998–2006, institutional investors mobilized about "44 percent of private funds." - Evidence of efficiency gains from private operators (global study): - "12 percent increase in residential connections for water utilities;" - "19 percent increase in residential coverage for sanitation services;" - "45 percent increase in electricity bill collection rates;" - "11 percent reduction in distribution losses." - Investment climate constraints for firms (Enterprise Surveys): - Three top constraints worldwide: regulatory environment, access to finance, and infrastructure. - In low-income countries, access to electricity and finance are top issues; lack of access to finance especially constrains SMEs. ### Private sector roles in health and education — patterns, evidence, and risks - Health financing and provision: - "One-half of health spending in many developing countries comes from private sources." - DHS-based findings: private formal and informal providers supply more than "50 percent" of MDG-related maternal, reproductive, and child health services in many surveys. - Quality evidence mixed: nongovernment providers "less likely to follow standard diagnostic and treatment protocols" in many settings; patient-perceived quality often favors private providers. - Innovations and contracting examples: - Chiranjeevi Yojana, Gujarat, India: raised institutional deliveries "from 38 percent to 59 percent" with private obstetrician contracting; provider participation increased "from 7 (public sector) to more than 800 (private sector)" in less than two years; additional cost to state ~"3.5 percent of the total health budget." - Social franchising example: HealthStore Foundation in Kenya (17 drug outlets, 48 basic medical clinics). - BRAC (Bangladesh): "largest nonprofit ... employing 125,000 staff"; reach and program scale figures detailed. - Education financing and provision: - Private schools enroll "more than two-thirds of all students" in some countries; private spending can exceed "40 percent" of total education expenditure in selected countries. - Selected country private enrollment shares and changes reported (Table 3.3 excerpts include numerous country-level percentages for 1990 and 2006). - Evidence on vouchers and contracting: rigorous studies show vouchers can improve secondary access, test scores, completion and later outcomes in some settings; contracting programs (e.g., Bogota concession schools) show significant increases in math and reading and reductions in dropout rates. - Policy implications: - Governments must strengthen capacities to design, manage, regulate, monitor, and evaluate mixed financing and delivery models to ensure safety, quality, equity, and financial protection. - "The aim should be better, not necessarily fewer, regulations." ### Poverty projections, new PPP-based poverty estimates, and MDG outlook - New global poverty estimates (ICP-based, $1.25/day, 2005 prices): - About "1,375 million people in developing countries (25 percent of the population) were living in extreme poverty in 2005," versus previous estimate of 935 million (17 percent). - New target poverty rate to achieve the poverty MDG: "20.9 percent" (half of 41.7 percent in 1990), replacing prior target of 14.4 percent. - Short-term poverty outlook (selected table entries, people below $1.25/day, 2005 PPP): - Total: 2008: 1,202.8; 2009: 1,183.6; Change in number: –56.9 - Low-income countries: 2008: 952.3; 2009: 947.8; Change in number: –26.9 - Middle-income countries: 2008: 262.1; 2009: 247.2; Change in number: –33.1 - Longer-term projections (selected table 1.6 entries): - Total: 1990: 1,816.6; 2005: 1,373.5; 2015: 925.2; % of population 1990: 41.7; 2005: 25.2; 2015: 15.1; Over/under MDG: 5.7 - Sub-Saharan Africa: 1990: 295.7; 2005: 388.4; 2015: 352.6; % of population 1990: 65.7; 2005: 50.9; 2015: 36.6; Over/under MDG: –7.8 - Projection caveats: "Projections are subject to considerable uncertainty and downside risks stemming from the crisis." ### Summary policy message and coordination - Immediate priorities: stabilize advanced-country financial systems; restore confidence; counter falling demand; mitigate crisis impact on developing countries’ growth and protect programs critical for the poor and vulnerable. - International coordination and leadership: - World leaders’ commitments at G-20 must be followed by "strong, concerted actions." - "The need for international cooperation has never been greater." — Robert B. Zoellick and Dominique Strauss-Kahn (Foreword signatories). - Operational recommendations (selected): - Scale up aid rapidly and predictably; honor existing pledges and consider going beyond Gleneagles commitments. - Resist protectionism and financial mercantilism; maintain open trade and finance. - Empower IFIs with mandate, resources, instruments, and governance reforms to match 21st-century global challenges. - Protect social safety nets, maintain infrastructure spending, support SMEs and trade finance, and strengthen financial supervision and contingency planning. *Source: GLOBAL MONITORING REPORT 2009 (excerpts from Foreword and Chapters 1–6).* ### Foreword .......................................................xi ### Foreword ### The nature of the crisis - The report title: “A Development Emergency.” - The financial crisis that grew into an economic crisis is now becoming an unemployment crisis, and "risks becoming a human and social crisis—with political implications." - The crisis is the most severe in over 70 years. - No region is immune; poor countries are especially vulnerable because they "have much less cushion to withstand events." ### Channels and magnitudes of impact on developing countries - Countries will be affected through reductions in export volumes, commodity prices, remittances, tourism, foreign direct investment, and possibly even foreign aid. - Private capital flows to the developing world are seeing their sharpest decline in many decades. - Middle-income countries were the first among developing countries to feel the impact, given their heavier reliance on private capital flows. - Both middle- and low-income countries will be hit hard in 2009 by a second wave of effects reflecting the global recession and declining world trade. - Economic growth in developing countries has declined sharply "to the lowest rates for some decades"; per capita incomes will fall in many countries. - Sub-Saharan Africa will see a rise in the poverty count in 2009, with the more fragile and low-growth economies especially at risk. - Globally, the report estimates "more than 50 million additional people living in extreme poverty in 2009 than expected before the crisis," compounding the impact from soaring food and fuel prices of recent years. ### Human consequences - Because of sharply lower economic growth rates, the report estimates "about 200,000 to 400,000 more babies may die each year." - School enrollments will suffer—especially for girls. - The prospect of reaching the MDGs by 2015, "already a cause for serious concern, now looks even more distant." ### Policy implication: need for a global response - "A global crisis requires a global solution." - The crisis began in the financial markets of developed countries, so "the first order of business must be to stabilize these markets." - Developing countries can provide a growth platform to help the global economy pull out of the crisis; protecting growth in developing countries matters for global recovery. *Source: Foreword, GLOBAL MONITORING REPORT 2009* ### FOREwORd ### FOREwORd ### Executive messages - The global financial crisis, the most severe since the Great Depression, is rapidly turning into a human and development crisis. - The crisis originated in the developed world but has spread quickly to the developing world, threatening gains toward the Millennium Development Goals (MDGs) and putting millions at risk. - Timely, adequate, and coordinated actions by developed countries are needed to restore confidence in the financial system and counter falling demand. - Strong and urgent actions are required to counter the impact on developing countries by helping them boost growth while protecting the poor. ### Six priority areas for action (developing countries) - Ensure an adequate fiscal response to protect the poor and vulnerable groups and to support economic growth. - Priority areas: strengthening social safety nets and protecting infrastructure programs that create jobs and build productivity. - Fiscal responses must be tailored to individual country circumstances and consistent with maintenance of macroeconomic stability. - Provide support for the private sector and improve the climate for recovery and growth in private investment. - Pay special attention to strengthening financial systems. - Help small and medium enterprises get access to finance for trade and investment to support job creation. - Broader reforms needed to improve stability and soundness of the financial system. - Redouble efforts in human development and recover lost ground in progress toward the MDGs. - Strengthen key public programs for health and education. - Better leverage the private sector’s role in financing and delivery of services. ### Three key global priorities (in support of developing countries) - Donors must deliver on their commitments to increase aid; increased needs call for going beyond existing commitments. - National governments must hold firm against rising protectionist pressures and maintain an open international trade and finance system. - Completing the Doha negotiations expeditiously would provide a much-needed boost in confidence. - Multilateral institutions must have the mandate, resources, and instruments to support an effective global response. - International financial institutions will need to play a key role in bridging the large financing gap for developing countries resulting from the slump in private capital flows, including using their leverage ability to help revive private flows. ### Global coordination and leadership - World leaders made important progress at the Group of Twenty summit; this must be followed by strong, concerted actions. - “The need for international cooperation has never been greater.” — Robert B. Zoellick and Dominique Strauss-Kahn *Signed: Robert B. Zoellick, President, The World Bank Group; Dominique Strauss-Kahn, Managing Director, International Monetary Fund.* ### Contributors and acknowledgments (high-level) - Report jointly prepared by staff of the World Bank and the International Monetary Fund in collaboration with partner institutions including the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank, the Organisation for Economic Co-operation and Development, the World Trade Organization, the United Nations Conference on Trade and Development, and other UN agencies. - Lead author and manager: Zia Qureshi. - Core team included World Bank members Felipe Barrera, Peter Berman, Jean-Pierre Chauffour, Punam Chuhan-Pole, Stefano Curto, Mary Hallward-Driemeier, Homi Kharas; IMF members Stijn Claessens, Richard Harmsen, Laura Kodres, Andrea Maechler, Axel Palmason. - Many additional contributors and staff from both institutions and partner organizations are acknowledged. ### Abbreviations (selected) - FDI Foreign direct investment - FSAP Financial Sector Assessment Program - G-8 Group of Eight - G-20 Group of Twenty - GAVI Global Alliance for Vaccines and Immunizations - GDP Gross domestic product - GEF Global Environmental Facility - GFATM Global Fund to Fight AIDS, Tuberculosis, and Malaria - GHG Greenhouse gases - GNI Gross national income - HIPC Heavily indebted poor country/countries - HIV Human immunodeficiency virus - IBRD International Bank for Reconstruction and Development - ICP International Comparison Program - IDA International Development Association (of the World Bank) - IDB Inter-American Development Bank - IEA International Energy Agency - IFC International Finance Corporation - IFI International financial institutions - ACP African, Caribbean, and Pacific countries - ADB Asian Development Bank - AfDB African Development Bank - AIDS Acquired immune deficiency syndrome - AMC Advanced Market Commitment - CCT Conditional cash transfer - CDM Clean Development Mechanism - CERs Certified emissions reductions - CPA Country programmable aid - CPIA Country Policy and Institutional Assessment - CRS Creditor Reporting System (of the OECD DAC) - CSR Corporate social responsibility - DAC Development Assistance Committee - DRF Debt Reduction Facility (of the World Bank) - EBRD European Bank for Reconstruction and Development - EC European Commission - EITI Extractive Industries Transparency Initiative - FAO Food and Agriculture Organization (of the UN) - IFFIm International Finance Facility for Immunizations - IHP International Health Partnership - ILO International Labour Organization - IMF International Monetary Fund - ITC International Trade Centre - LDCs Least-developed countries - MDBs Multilateral development banks - MDG Millennium Development Goal - MDRI Multilateral Debt Relief Initiative - MFIs Microfinance institutions - MSE Micro- and small enterprise - NAMA Nonagricultural market access - NEPAD New Partnership or African Development - NGOs Nongovernmental organizations - NTM Nontariff measure - ODA Official development assistance - OECD Organisation for Economic Co-operation and Development - OTRI Overall Trade Restrictiveness Index - PFM Public financial management - PPIAF Public-Private Infrastructure Advisory Facility - PPP Purchasing power parity - PTA Preferential trade agreement - SIAP Sustainable Infrastructure Action Plan - SME Small and medium enterprises - SWF Sovereign wealth fund - TTRI Tariff Trade Restrictiveness Index - UN United Nations - UNDP UN Development Programme - UNFCCC UN Framework Convention on Climate Change - WFP World Food Programme - WHO World Health Organization - WTO World Trade Organization ### Overview: Crisis and impacts on developing countries - The crisis comes on the heels of food and fuel crises, creating a "triple jeopardy" for poor countries. - With the seizing-up of international financial markets in 2008, emerging market countries were the first among developing countries to feel the impact due to reliance on private capital flows. - Private capital flows to the developing world are seeing their sharpest slump ever, with net flows likely turning negative in 2009—a more than $700 billion drop from the peak in 2007. - Many low-income countries are affected by the private credit crunch; private flows to these countries, including several in Africa, that had increased in recent years are now falling. - These countries are expected to be hit particularly hard in 2009 by a second round of impacts reflecting the global recession and declining world trade: - World gross domestic product (GDP) is projected to decline in 2009 for the first time since World War II. - World trade is projected to register its largest decline in the post-war period. - Low-income countries will be affected through reductions in export volumes, commodity prices, remittances, tourism, foreign direct investment, and possibly even foreign aid. - Shocks will hurt public revenues and add to the negative fiscal impact of the food and fuel crises, putting pressure on public expenditure programs. - Financial systems in low-income countries may be hit by second-round effects as the economic downturn increases problem loans, limiting domestic financing availability. ### Growth projections and regional impacts - Average projected GDP growth in developing countries in 2009 is now only about a quarter of what was expected before the financial turmoil intensified and a fifth of that achieved up to 2007. - For developing countries as a whole, growth is now projected to fall to 1.6 percent in 2009, from an average of 8.1 percent in 2006–07. - Growth in Sub-Saharan Africa is projected to slow to 1.7 percent in 2009, from 6.7 percent in 2006–07. - Countries in Eastern Europe and Central Asia with weaker macroeconomic fundamentals are most severely hit, with average growth in the region in 2009 now projected to be negative. - Average growth in Latin America and the Caribbean also is projected to be negative in 2009. - Current growth projections, adjusted for terms-of-trade changes, imply declining real per capita incomes for more than 50 developing countries in 2009. ### Impact on poverty reduction and MDGs - Food price increases between 2005 and 2008 pushed around 200 million more people into extreme poverty; about half of them will remain trapped in poverty in 2009 even as food prices recede from their peaks. - While food prices have fallen since mid-2008, they remain high by historical standards. - The slowdown in growth resulting from the financial crisis will add to the poverty impact of high food prices. - The International Labour Organization projects that some 30 million more people around the world may be unemployed in 2009, of whom 23 million could be in developing countries. - A worse-case scenario envisages as many as 50 million more people becoming unemployed in 2009. - Estimates of the poverty impact of the growth slowdown range from 55 million to 90 million more extreme poor in 2009 than expected before the crisis. - These numbers will rise if the crisis deepens and growth in developing countries falters further. - In Sub-Saharan Africa and South Asia, the growth slowdown essentially eliminates the pre-crisis prospect of continued reductions in the poverty count in 2009. - The poverty count is likely to rise in Sub-Saharan Africa in 2009. - Overall, on current growth projections, more than one-half of all developing countries could experience a rise in the number of extreme poor in 2009; this proportion is likely to be still higher among low-income countries and countries in Sub-Saharan Africa—two-thirds and three-quarters, respectively. - Experience suggests growth collapses are costly for human development outcomes: - Countries that suffered economic contractions of 10 percent or more between 1980 and 2004 experienced more than 1 million additional infant deaths. - It is estimated that the sharply slower economic growth resulting from the current financial crisis may cause as many as 200,000 to 400,000 more infant deaths per year on average between 2009 and the MDG target year of 2015. *Source: GLOBAL MONITORING REPORT 2009 — FOREwORd (World Bank and IMF joint report).* ### 1.4 million to 2.8 million additional infant ### _gmr - 1.4 million to 2.8 million additional infant ### Human costs and nutrition impacts - 1.4 million to 2.8 million additional infant deaths during the period. - The food crisis has already caused the number of people suffering permanent damage from malnutrition to rise by 44 million. - The financial crisis will exacerbate malnutrition as poor households respond to decreases in income by further cutting the quantity and quality of food consumption. - Long-run consequences can be irreversible: reduced (or inferior) food consumption can retard growth as well as cognitive and learning abilities. ### Current human development shortfalls (MDG halfway point) - Around 75 million children of primary school age were not in school. - 190,000 children under five died every week from preventable disease. - 10,000 women died every week from treatable complications of pregnancy. - More than 2 million people died from AIDS annually, close to 2 million from tuberculosis, and about 1 million from malaria. - Around 1 billion people suffered from hunger and twice as many were undernourished. - About half of the developing world lacked access to basic sanitation. - Education outcomes, such as school enrollment, tend to deteriorate during economic crises—especially for girls. ### MDG outlook and regional disparities - Strong economic growth in developing countries in the past decade had put the MDG for poverty reduction within reach at the global level, but the triple punch of the food, fuel, and financial crises creates new risks. - Sub- Saharan Africa lags on all MDGs, including the goal for poverty reduction. - South Asia lags on most human development MDGs; it will likely meet the poverty reduction goal, although barely. - Middle- income countries have made the most progress toward the MDGs but continue to have large concentrations of poverty and challenges on non-income human development goals. - Progress has been weaker overall in low- income countries and slowest in countries in fragile situations. ### Priorities for action (Box 1) - Ensure an adequate fiscal response to support economic growth and protect poor and vulnerable groups from the impact of the crisis—consistent with maintenance of macroeconomic stability - Shore up the private sector and improve the climate for recovery and growth in private investment, including paying special attention to strengthening financial systems - Redouble efforts toward the human development goals, including leveraging the private sector role - Scale up aid to poor and vulnerable countries hit hard by the crisis - Maintain an open trade and finance system—including quick action on the Doha Round - Ensure that the multilateral system has the mandate, resources, and instruments to support an effective global response to the global crisis ### Ensuring an adequate fiscal response - Many developing countries lack resources to mount fiscal responses; public revenues will fall and external financing will dry up. - Additional financing, on appropriate terms, would help support growth and protect the poor and vulnerable. - At least one- half of developing countries today have the macroeconomic conditions (taking into account fiscal and external sustainability considerations) and institutional capacities to underpin some fiscal expansion if financing on appropriate terms were available. - Countries must use available scope for domestic resource mobilization and focus expenditures on core priorities: infrastructure for growth, key investments in human capital, and social safety nets. - Social safety nets recommendations: conditional cash transfers to poor households, workfare schemes, and maternal- child or school feeding programs. ### Supporting the private sector and infrastructure - Fiscal stimulus will catalyze sustainable economic growth only if there is a vigorous private sector response supported by an enabling environment: access to finance, infrastructure, and quality of business regulation. - In the current credit crunch, urgent action is needed to shore up private sector access to finance for investment and trade, with special focus on small and medium enterprises. - Strengthening financial regulation and supervision is essential; some countries will likely need to recapitalize distressed financial institutions. - Infrastructure financing: Sub- Saharan Africa could reduce its infrastructure financing gap of about $40 billion annually by as much as 45 percent through improved management of investments, reduction of operating inefficiencies, and better cost recovery. - Multilateral financial institutions need to play a stronger supporting role, including shoring up viable ongoing public- private partnership projects facing financial distress. - Investments in energy- efficient infrastructure can contribute to economic recovery, growth, and mitigation of climate change; carbon markets can help mobilize private financing for environmentally sustainable investments. - Measured by the World Bank Group’s Doing Business and Enterprise Surveys, developing countries have implemented significant regulatory reforms, but progress is uneven; the aim should be better, not necessarily fewer, regulations. ### Mobilizing the private sector for human development - One- half of health spending in many developing countries comes from private sources. - Recent surveys in Sub- Saharan Africa and South Asia find that more than half of the MDG- related maternal, reproductive, and child health services used are privately provided. - In South Asia, the share of private enrollment in primary and secondary education averages about 30 percent. - The private sector can bring resources, innovation, flexibility, and quality improvements; governments should develop requisite frameworks to work effectively with private providers. ### Exposure and capacity of developing countries - As many as 90 percent of developing countries are assessed to be highly or moderately exposed to the impact of the crisis. - Three- quarters of the exposed countries lack the fiscal capacity to finance programs to curb the effects of the downturn. - Those with good macroeconomic management and institutional capacities should be assisted with financing to enhance their fiscal space to respond to the crisis. *Source: _gmr - 1.4 million to 2.8 million additional infant (PDF chapter/section).* ### 0.7 percent of their stimulus packages, or ### _gmr - 0.7 percent of their stimulus packages, or ### Vulnerability Fund and crisis-response priorities - Proposal: 0.7 percent of their stimulus packages, or about $15 billion based on the packages announced to date, in a Vulnerability Fund to help developing countries. - Purpose: Support three crisis-response priorities in developing countries that lack the resources to act on their own: - strengthening social safety nets - funding investments in essential infrastructure - supporting financing for small and medium enterprises and microfinance institutions - Delivery: Resources to be channeled through multilateral and bilateral agencies, in programs backed by safeguards to ensure they are well spent. ### Aid effectiveness and changing aid landscape - Urgent need to expedite progress on the Accra Agenda for Action: better aid alignment and harmonization, improved aid predictability and timeliness, and a stronger focus on results. - As the aid landscape changes with a growing role of non-DAC official donors and private sources of aid and an increasing array of aid modalities, aid coordination frameworks must encompass a broader range of development partners. - Private international giving: - OECD estimate: $18.6 billion in 2007 (noted as widely considered an underestimate). - Alternative estimate: private international giving from the United States alone at $34.8 billion in 2006. - Private sources include foundations, corporations, and civil society organizations; they have spawned innovative public-private partnerships in health, education, and climate change. - Concern: the financial crisis may interrupt rising capacities for regulation and oversight, use of incentives, and improvements in governance and accountability arrangements. ### Examples and innovations in private financing - Notable private contributions: sizable contributions from the Bill and Melinda Gates Foundation into the Global Alliance for Vaccines and Immunization and the Global Fund to Fight AIDS, Tuberculosis, and Malaria. - Advanced Market Commitment mechanism: cited as an innovative way to leverage corporate finance in development of treatments for diseases in poor countries. - Recommendation: Expanded potential of private international financing (from non-governmental organizations, foundations, and business corporations) and related innovations in financing modalities and delivery vehicles need to be effectively tapped. ### Scaling up official aid (ODA) and donor commitments - ODA from DAC members rose by about 10 percent in real terms in 2008, following declines in ODA in both 2006 and 2007. - In real terms, ODA from DAC donors in 2008 was about $29 billion short of the Gleneagles target of $130 billion per annum by 2010. - ODA to Sub-Saharan Africa was about $20 billion short of the 2010 target of $50 billion per annum. - Policy recommendation: Donors should scale up rapidly to deliver on these commitments despite crisis-induced fiscal pressures. - Argument: Additional sums needed to meet Gleneagles commitments amount to a fraction of the support provided to rescue individual financial institutions and a miniscule proportion of the fiscal stimulus packages announced. - Suggestion: The crisis calls for going beyond the commitments made at Gleneagles. ### Trade openness, trade facilitation, and aid for trade - Priority: Maintain and improve developing countries’ access to international markets; strengthen support for trade facilitation (trade-related infrastructure, finance, regulations, logistics such as customs services and standards compliance). - Finding: Research shows that in many low-income countries trade facilitation can be at least as important as further reduction in trade tariffs in boosting trade. - Aid for trade: - Should be scaled up substantially. - While rising overall, aid for trade from bilateral sources declined in 2007. - More aid for trade needs to be directed to low-income and the least developed countries, which currently receive only about one-half and one-quarter of the total, respectively. ### Risks of protectionism and maintaining open financial flows - Recent trends: food, fuel, and financial crises have increased protectionist pressures (trade taxes, quotas, export bans, border barriers, subsidized import-competing industries, “buy national” policies). - Costs: Such measures retard market corrections, distort trade, risk retaliation, deepen the slump in global trade, and undercut prospects for economic recovery. - G-20 commitments: - Reaffirmation to refrain from raising new barriers to investment or trade in goods and services, imposing new export restrictions, or implementing WTO-inconsistent measures; agreed to rectify promptly any such measures. - Emphasis on following through with firm resolve. - Concern: Government interventions in advanced-country financial systems may be accompanied by pressures on financial institutions to curtail cross-border lending; a shift toward financial mercantilism must be resisted as it would particularly hurt financial flows to developing countries. - Role of private aid: If effectively deployed, private aid can complement public aid and be a partner in development. ### Empowering multilateral institutions (IFIs and MDBs) - G-20 financial support actions: - Agreed to support a tripling of resources available to the IMF to $750 billion. - Supported a general allocation of the Special Drawing Rights (SDRs) equivalent to $250 billion to increase global liquidity, $100 billion of which will go directly to emerging market and developing countries ($19 billion to low-income countries). - IMF actions: - Established a new Flexible Credit Line for large and upfront financing to emerging market economies with strong fundamentals and policies. - Enhanced flexibility of regular stand-by arrangements. - Doubled access limits for emerging markets and low-income countries. - Reformed conditionality to make it more focused and tailored to country circumstances. - Plans to step up lending to low-income countries to around $3 billion a year over the next two years—triple last year’s level. - MDB commitments and needs: - Supported an increase in MDB lending of $100 billion to a total of around $300 billion over the next three years; agreed to ensure that all MDBs have appropriate capital. - Supported a 200 percent general capital increase at the Asian Development Bank (ADB) and reviews for other MDB capital needs. - Supported, through voluntary bilateral contributions, the World Bank’s Vulnerability Framework, including the Infrastructure Crisis Facility and the Rapid Social Response Fund. - Concessional windows of the African Development Bank, the ADB, and the World Bank have received significant increases in resources through recent replenishments. - Immediate need: donors to honor existing pledges to the MDB concessional windows and to the MDRI. - MDB operational flexibility: Considerations include increasing individual country limits on lending; raising limits on the proportion of quick-disbursing financing; front-loading commitments; accelerating disbursements on existing projects; and allowing low-income countries access to non-concessional windows while ensuring debt sustainability. - Leverage and instruments: Increased demand for risk mitigation and public-private partnerships will call for more fully exploiting the leverage of MDBs’ private sector arms, such as the IFC, and guarantee instruments. - IFIs’ non-financing role: Provide knowledge, analyze international spillovers of national policy actions, highlight interconnected challenges, warn against risks of trade protectionism and financial mercantilism, and draw policy lessons—especially in financial regulation. - Governance reform: Crisis underscores need to reform IFIs to align governance with today’s economic realities and reconfigure 20th-century global institutions to match 21st-century global challenges. ### Trade finance and short-term liquidity support - G-20 agreement: Ensure availability of at least $250 billion of trade finance over the next two years through export credit and investment agencies and through MDBs. - IFC action: Up to $50 billion of trade liquidity support over the next three years through the new Global Trade Liquidity Pool introduced by the International Finance Corporation (IFC). ### Financing gaps and scale of needs - With the slump in private capital flows, estimates of developing countries’ financing gap in 2009 reach as high as $1 trillion. - IFIs will need more resources to meet sharply increased demand for balance of payments financing and budget support for critical public spending (social safety nets, key infrastructure) and to shore up private sector through trade financing, bank recapitalization, and financing for small and medium enterprises. ### MDGs: Crisis impact and outlook - Assessment (mid-2008): Major shortfalls in several MDGs; world leaders called for scaling up development efforts. - Crisis effects: - The food, fuel, and financial crises together add new challenges to achieving the MDGs. - Rise in food prices between 2005 and 2008 pushed an estimated 160 million to 200 million more people into extreme poverty. - Falling food prices since mid-2008 are helping reduce this number; preliminary projections suggest that as local prices come into line with international prices, between 90 million and 120 million people who were pushed into poverty by high food prices by 2008 may emerge from poverty in 2009. Still, up to 100 million people pushed into poverty by the high food prices would remain poor in 2009. - Growth slowdown effects: - Projected economic growth in developing countries in 2009 on average is now only about a quarter of that forecast before the onset of the financial crisis. - Historical relationship: a decline in the average GDP growth rate in developing countries by one percentage point can trap as many as 20 million more people in poverty. - Estimates of the poverty impact of the growth slowdown in developing countries as a result of the financial crisis range from 55 million to 90 million more poor people in 2009 than anticipated before the crisis. - Vulnerability assessment: - A World Bank assessment found that almost 40 percent of developing countries were highly exposed to the poverty effects of the crisis (with both declining growth rates and high levels of poverty); most of the others were moderately exposed, with fewer than 10 percent facing little risk. - Three-quarters of the exposed countries had limited fiscal capacity to expand programs to curb effects of the economic downturn. - Regional note: In Sub-Saharan Africa and South Asia (except India), the growth slowdown essentially eliminates the prospect of continued reductions in the poverty count at current growth projections. *Source: GLOBAL MONITORING REPORT 2009 (excerpts).* ### 2009. Within these regions, which already ### 2009. Within these regions, which already ### Poverty and crisis impact - Rising poverty expected in some fragile and low-growth economies, which may experience declines in per capita incomes as a result of the growth slowdown. - Severe financial crises in the past that caused growth to turn negative produced sharp increases in poverty rates: - Indonesia: poverty head-count index rose by 11 percent in 1997 and a further 19.9 percent in 1998. - Thailand: increases of 9.8 percent and 12.9 percent in the same crisis years. - Countries that suffered economic contractions of 10 percent or more between 1980 and 2004 experienced more than 1 million additional infant deaths. - Projected slowdown in developing-country growth may increase infant deaths: - Infant deaths in developing countries may be 200,000 to 400,000 per year higher on average between 2009 and 2015 than without the crisis. - This translates into an additional 1.4 million to 2.8 million infant deaths during the period. ### Hunger, malnutrition, and food crisis effects - Although the proportion suffering from hunger has fallen since 1990, serious shortfalls remain in halving incidence of hunger and malnutrition. - About 1 billion people now suffer from hunger, and about 2 billion are undernourished. - The food crisis is estimated to have caused the number of people suffering permanent damage from early childhood malnutrition to rise by 44 million in 2008. - High food prices disproportionately affect the world’s poor, especially urban poor who are net food buyers and spend over half of their income on food. - Decreases in household incomes can reduce both the quantity and quality of food consumption; children and women are particularly vulnerable. - Child malnutrition accounts for 35 percent of the disease burden of children under age five. - The proportion of under-five children in developing countries who are underweight declined from 33 percent in 1990 to 26 percent in 2006. - Currently, more than 140 million children under five in developing countries suffer from malnutrition. ### Human development outcomes, education, and long-run effects - The long-run implications may be more severe than short-run impacts: withdrawing children from school risks permanent loss of schooling and learning gaps; declines in child nutrition and health can be irreversible. - In poor developing countries, education outcomes such as school enrollment tend to deteriorate during economic crises; income fluctuations have larger impacts on survival and school enrollment among girls than boys. - Primary school completion: - In 2006 the primary school completion rate reached 85 percent for all developing countries, 93 percent in middle-income countries, and 65 percent in low-income countries. - As many as 75 million children of primary school age were not in school in 2007. - Gender parity: - Almost two-thirds of developing countries reached gender parity at the primary school level by 2005. - The MDG 3 target of achieving gender parity in primary and secondary education can be met by 2015 at the global level, though Sub-Saharan Africa is likely to fall short. - Maternal and child mortality: - Under-five mortality in developing countries declined from 93 to 72 deaths per 1,000 live births between 1990 and 2006. - In Sub-Saharan Africa, the under-five mortality rate in 2007 was 146 deaths per 1,000 live births, down from 183 in 1990. - An estimated 33 million individuals were living with HIV/AIDS in 2007; annual deaths from AIDS are estimated at more than 2 million a year. - Tuberculosis killed 1.8 million people in 2006. - Mortality from malaria remains about 1 million annually, 80 percent of whom are children under five in Sub-Saharan Africa. - Maternal mortality ratio declined by less than 1 percent per year between 1990 and 2005, far below the 5.5 percent annual decline needed to achieve MDG 5. - Sub-Saharan Africa maternal mortality ratio: 900 deaths per 100,000 births — twenty times greater than Europe and Central Asia. - As many as 10,000 women die every week in developing countries from treatable complications of pregnancy and childbirth. ### MDG progress and outlook - Global-level prospects (based on current growth projections with recovery starting in 2010): - Reducing income poverty remains within reach at the global level. - Gender parity in primary and secondary education and access to safe water have seen relatively good progress and are expected to be met at the global level by 2015. - Nonincome human development goals (child and maternal mortality, primary school completion, nutrition, sanitation) are unlikely to be met at the global level. - Regional and country variation: - Sub-Saharan Africa lags on all MDGs, including poverty reduction. - East Asia has largely succeeded in halving extreme poverty; China played a major role. - South Asia is on track for poverty reduction but seriously off track on most human development goals. - Middle-income countries as a group are on track to achieve the poverty reduction target but still contain large concentrations of poverty. - Fragile and conflict-affected states have made the least progress toward the MDGs; fragile states account for close to one-fifth of the population of low-income countries but more than one-third of their poor people. - For developing countries as a whole, the proportion of extreme poor is projected to fall to 15 percent by 2015, below the MDG target of 21 percent. ### New estimates of global poverty (Box 1) - Uses new PPPs from the International Comparison Program (ICP) and an expanded set of household surveys covering 115 developing countries. - International poverty line recalibrated to $1.25 a day (measured in 2005 prices), replacing the $1.08 a day line (1993 prices). - New estimates imply more poor people and greater incidence of poverty in middle-income countries: - About 1,375 million people in developing countries (25 percent of the population) were living in extreme poverty in 2005, compared with the previous estimate of 935 million (17 percent). - The new target poverty rate to achieve the poverty MDG is 20.9 percent (half of 41.7 percent in 1990), rather than the previous 14.4 percent (half of 28.7 percent in 1990). - The upward revision does not imply the rate of poverty reduction since 1990 has been less rapid than previously estimated. *Global Monitoring Report 2009 — MDGs: Crisis Impact and Outlook* ### 1. United Nations. 2008. “Committing to ### The Global Financial Crisis and Its Impact on Developing Countries ### Summary assessment of MDG outlook - Provides a summary assessment of the outlook for the MDGs; more details on trends and a listing of the goals are provided in the annex to the report. - Definitions of exposure to the financial crisis: - High exposure: countries experiencing combined effects from both declining growth rates and high initial poverty levels. - Moderate exposure: countries affected by either decelerating growth or high poverty levels. - Low exposure: economic growth at rates similar to precrisis conditions and low initial poverty levels. - Key messages on international cooperation and aid: - Net ODA disbursements from the Development Assistance Committee rose during 2003–05 but fell in both 2006 and 2007, dropping from 0.33 percent of donors’ gross national income (GNI) in 2005 to 0.28 percent in 2007. - The ODA-to-GNI ratio increased to 0.30 percent in 2008, but larger and sustained increases in ODA will be needed to meet donors’ aid commitments. - Donors will need to demonstrate resolve in shielding aid budgets from the fiscal impact of the financial crisis. - The largest implementation gap in the trade area is the failure to date to conclude the Doha Round of trade negotiations. - Greater progress has been achieved in the provision of debt relief to poor countries, thanks to the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative. - Monitoring transfer of technology and access to essential drugs is challenged by the lack of specific targets for commitments in these areas. ### Main messages on the crisis and its implications - The world faces the severest credit crunch 77 and recession since the Great Depression. Developing countries’ growth prospects and access to external financing are subject to unusually large downside risks. - Though originating in advanced countries, the crisis is hitting developing countries hard. - While transmission channels may differ, both emerging market and low- income countries will be severely impacted. - Economic policy responses should be adapted to country circumstances: - Countries with strong fundamentals may have room for monetary and fiscal stimulus, - Those in weaker macroeconomic positions and with limited access to external financing will have less room for policy maneuver; some may need to undertake fiscal consolidation. - Advanced, emerging, and developing countries should take comprehensive action to resolve liquidity and solvency problems in the banking system and strengthen prudential supervision. - Development aid must be increased to help countries cope with the crisis. - It is crucial to maintain an open trade and exchange system. - The immediate priority is to mitigate the impact of the crisis on developing countries’ growth and on programs critical for the poor and vulnerable, while maintaining international cooperation in the spirit of the Monterrey framework. ### Economic developments and projections - Global GDP growth: - On an annualized basis, global GDP growth slowed to 2 percent in the second half of 2008 after an average growth rate of 5 percent over 2003–07. - World Economic Outlook April 2009 baseline: - Projects a contraction of global output by 1.3 percent in 2009, compared with 3.2 percent growth in 2008 (table 1.1). - Advanced economies: - Advanced economies are expected to contract in 2009 by 3.8 percent, compared with 0.9 percent growth in 2008. - Emerging and developing economies: - Emerging market growth is expected to decline sharply to 1.5 percent in 2009, from 6.1 percent in 2008. - Growth in Sub-Saharan Africa will drop to 1.7 percent in 2009, from 5.5 percent in 2008. - Table 1.1 (selected entries, annual percent change): - World output: 2008 = 3.2; 2009 = –1.3; 2010 = 1.9 - Advanced Economies: 2008 = 0.9; 2009 = –3.8; 2010 = 0.0 - United States: 2008 = 1.1; 2009 = –2.8; 2010 = 0.0 - Emerging markets and developing countries: 2008 = 6.1; 2009 = 1.6; 2010 = 4.0 - Sub-Saharan Africa: 2008 = 5.5; 2009 = 1.7; 2010 = 3.8 - China: 2008 = 9.0; 2009 = 6.5; 2010 = 7.5 - India: 2008 = 7.3; 2009 = 4.5; 2010 = 5.6 ### Financial turmoil and transmission to emerging markets (Box 1.1 and discussion) - Financial conditions expected to remain difficult in 2009 and could deteriorate further if the adverse feedback loop between the slowdown in the real economy and financial markets intensifies. - Systemic financial risks appear elevated despite aggressive and unprecedented policy measures; these have failed to restore confidence in banks. - Key points from Box 1.1 (verbatim style as in source): - Systemic financial risks again appear elevated and policy measures, although aggressive and unprecedented, 77 have failed to restore confidence in banks. Bank equity prices and credit premiums reflect serious solvency concerns, and in the absence of private sector willingness to provide bank capital, the policy debate has shifted toward the form and degree of public intervention. Recent borrowings have been confined to those that bear government guarantees. - Even with significant public capital injections, the pressure for banks in advanced economies to delever will 77 remain high as loan losses continue to accumulate, limiting the supply of credit into 2010. Other sources of financing also appear limited in the short term, apart from those supported by government programs. - Firms will be under increasing stress in 2009, as earnings deteriorate. Conditions will be especially difficult for 77 firms with lower credit ratings, which will face significantly higher financing costs, if they can borrow at all. - One risk is that an increase in the supply of government debt will lead to a rise in long- term rates, choking off 77 demand for financing by creditworthy borrowers. - There has been a structural reassessment of credit risk as a result of the crisis. The amount of financial lever-77 age that markets are allowing will be reduced for a sustained period. - The widespread process of deleveraging and risk retrenchment is continuing to weaken a broad range of finan-77 cial markets and institutions. - Funding markets continue to be dominated by central bank operations and, despite measures to alleviate credit 77 risk, residual counterparty concerns are limiting interbank activity. - Cross- border bank financing has contracted sharply. This has placed significant pressure on some European 77 banking systems reliant on cross- border flows to meet dollar refinancing needs, especially in emerging Europe. - Securitization markets remain severely hampered but are being supported by government guarantees or asset 77 purchases that are being extended to a widening range of securities. - Institutional investors have faced significant redemptions from retail clients while hedge funds’ assets under 77 management have fallen substantially due to losses and redemptions, and their access to financing has declined markedly. - Declining asset prices are spreading strains to other nonbank financial institutions such as insurance companies 77 and pension funds, which may face solvency risks forcing asset sales that add to adverse feedback loops. - Market volatility has dropped from the levels of late 2008, but equity markets remain near multiyear lows and credit spreads near multiyear highs. - Coordinated interventions and swap arrangements by global central banks have eased short- term liquidity condi-77 tions and offshore dollar shortages, but conditions have not normalized and liquidity remains very limited at longer maturities. - Asset purchase programs have led to some tightening of spreads in several markets (for instance, U.S. agency 77 securities, commercial paper, and consumer asset-backed securities), but spreads are rising further for corporate debt and commercial mortgages for which no government support is in place. - Emerging markets are coming under serious pressure from the global credit and economic crisis, particularly 77 in emerging Europe. - Emerging market financing costs remain significantly higher than precrisis levels, and bond issuance, which was 77 extremely low in the fourth quarter of 2008, has recovered only marginally, largely confined to higher- quality borrowers. - Emerging market corporates are facing extremely serious financing constraints, and some will almost certainly be unable to meet rollover needs. - Advanced economy banks undergoing severe pressures to shrink balance sheets are likely to scale back lending 77 to emerging markets, particularly in Europe. Local banks, facing their own pressures to deleverage, will be hard- pressed to substitute for the drop in financing of corporate clients from international banks and credit markets. ### Trade, commodity prices, inflation, and capital flows - International trade flows collapsed in the last quarter of 2008, with world exports projected to decline in 2009 for the first time since 1982 (figure 1.1). - Commodity and food prices: - Commodity and food prices came down considerably from their peaks in mid-2008. - Headline inflation in advanced economies receded to around 3.5 percent in December 2008 (12-month rate), down from 4.5 percent in mid-2008. - Risks of deflation have become a concern in some advanced economies given rapidly rising unemployment and output gaps. - Commodity and food prices are projected to rise again once global growth picks up. - Capital and financial flows (Table 1.2 highlights): - In 2008 private financial flows to emerging markets declined by about 2 percentage points of GDP compared with 2007, while flows to other developing countries continued to rise. - Table 1.2 (selected entries, % of GDP): - Emerging market economies total (2008) = 8.4; (2009) = 3.8 - Emerging market private capital flows, net (2008) = 3.4; (2009) = –0.6 - Other developing countries total (2008) = 18.3; (2009) = 16.2 - Other developing private capital flows, net (2008) = 6.8; (2009) = 4.9 - Memorandum items (US$ billions): - Private capital flows, net (2008) = 307; (2009) = –82 - Total net private financial flows including current transfers (2008) = 586; (2009) = 180 ### Policy priorities and recommendations - Immediate priorities: - Mitigate the impact of the crisis on developing countries’ growth and on programs critical for the poor and vulnerable. - Preserve the promise of the MDGs through a strong, coordinated international response and mutual accountability of both developing and developed countries. - Policy responses: - Restore confidence in the financial system and counter falling international demand to support economic recovery. - Adapt economic policy responses to country circumstances (use of monetary and fiscal stimulus where room exists; fiscal consolidation where necessary). - Take comprehensive action to resolve liquidity and solvency problems in the banking system and strengthen prudential supervision. - Increase development aid and shield aid budgets from the fiscal impact of the crisis. - Maintain an open trade and exchange system. - Address financing constraints for emerging market corporates and sovereigns, and monitor effects of advanced-economy policy measures (including deposit insurance and public support) on capital flows to emerging markets. *Global Monitoring Report 2009 — Chapter 1, "The Global Financial Crisis and Its Impact on Developing Countries"* ### chAPTER 1 ### chAPTER 1 ### Financial system vulnerabilities and capital flow reversals - Domestic banks in low- income countries usually fund lending activities in relatively stable domestic savings markets and often have ample liquidity reserves parked at the central bank. - Domestic interbank money markets and derivatives markets are in general small or nonexistent. - Credit markets have therefore not witnessed the instabilities seen in some advanced economies, although: - foreign parent banks have withdrawn capital from subsidiaries in some countries; - stock markets have dropped sharply; - nonperforming loan portfolios may rise if economic activity weakens further. - Some low- income countries have shown signals of sagging confidence in the banking system. - As private investment plans are being scaled back, all groups of countries will be faced with sharply reduced syndicated bank lending, portfolio flows, and foreign direct investment in 2009. ### Exchange rate movements and market volatility (summary of figure 1.4 and Box 1.2) - Emerging market currencies have seen sharp declines in recent months; market volatilities have risen to levels not seen after the Asian crisis of the 1990s. - Example: volatility of the Indonesian rupee increased almost fivefold in 2008 compared with 2007. - Contributing factors to increased exchange rate volatility: - Perceptions of increased external vulnerabilities amid slowing global growth and weakening commodity prices. - Shrunk risk budgets of international banks acting as market makers (lowered stop- loss thresholds; some large market makers, including Lehman Brothers and Bear Stearns, have withdrawn). - U.S. dollar liquidity squeeze on offshore markets reduced market makers’ turnover and cushioning impact on daily volatility. - Some banks deprived of access to U.S. dollar lending from correspondent banks; mitigated in part by swap arrangements between the Federal Reserve and Brazil, the Republic of Korea, Mexico, and Singapore. - Withdrawal of key market makers and investment banks (reliance on interbank market, lack of deposit base) reduced the cushion of risk capital. - Volatility measure: - Volatility is calculated as the index of the annual coefficients of variation (standard deviation/mean) of daily spot exchange rates. ### Rising vulnerabilities in emerging and developing countries - Confluence of weak economic activity, sharp swings in commodity prices, and financial market instability is increasing vulnerabilities. - Countries that entered the global crisis with weak macroeconomic fundamentals are most severely hit. - Terms- of- trade effects: - As a group, terms of trade for emerging and developing countries have not changed much in recent years, but there are sharp contrasts depending on countries’ composition of imports and exports. - Commodity- importing emerging markets with large manufacturing industries and net fuel importers benefit from lower commodity input prices. - Countries highly dependent on exports of fuels, metals, and some other commodities are experiencing a weakening of their terms of trade. - Remittances: - Reflecting rising unemployment and weak earnings growth among migrant workers in advanced economies, remittance flows to developing countries began to slow down in Q3 2008. - Although in U.S. dollar terms remittances are still up for 2008 as a whole, overall flows are projected to fall by 5 percent to 8 percent in 2009. - Countries relying on remittances most affected: Latin America, the Middle East and North Africa, and South Asia. - Per capita income adjusted for terms of trade: - 13 Sub-Saharan African countries will experience decline in per capita income in 2009 on the order of 11 percent on average. - North Africa and the Middle East face comparable situations; other regions are less affected. - Official transfers and aid: - Official transfers are expected to either remain broadly unchanged or decline in 2009, at a time when private capital flows are slowing rapidly. - “On current trends, official aid will not play a counter cyclical role in developing countries as it should. To prevent a reversal of years of development progress, official aid should be increased substantially in 2009 and later years.” - Current accounts and reserves: - More than half of the emerging and developing countries can expect a weakening of current account balances in 2009. - Oil exporters in the Middle East and North Africa: average weakening in current account balances by 6 percentage points of GDP in 2009. - Europe and the Commonwealth of Independent States (CIS): weakening of about 3.5 percentage points of GDP in 2009. - 14 countries are projected to see a deterioration in the current balance of more than 10 percent of GDP. - Many countries will experience steep declines in foreign exchange reserves in 2009, especially in Europe and Sub- Saharan Africa, and the risks of debt defaults are rising. ### Remittances (table 1.3 data) - Remittances include workers’ remittances, compensation of employees, and migrant transfers. - Emerging market economies (US$ (billions)): - Annual average 1992–2002: 56.8 - 2003: 114.4 - 2004: 128.0 - 2005: 153.5 - 2006: 179.1 - 2007: 218.9 - 2008 (estimate): 240.5 2 2 9.1 2 2 7. 5 - 2009 (base case scenario forecast): [entry in source text unclear] - 2010 (base case scenario forecast): [entry in source text unclear] - Other developing countries (US$ (billions)): - Annual average 1992–2002: 16.8 - 2003: 27.5 33.8 39.2 47.3 59.2 62.0 58.1 66.0 (source text entries run together) - Fragile states (US$ (billions)): - 1992–2002: 1.2 - 2003: 2.7 - 2004: 3.1 - 2005: 2.7 - 2006: 3.1 - 2007: 4.1 - 2008: 4.3 - 2009 (estimate): 4.2 - 2010 (forecast): 5.2 - Source note: World Bank remittances data; table entries in the source PDF show formatting irregularities for some 2008–2010 figures. ### Macroeconomic and fiscal impact; policy challenges - Fiscal positions are weakening in 2009 due to: - slowing domestic revenue growth; - increased spending on social programs in response to the crisis; - deteriorating terms of trade in commodity exporters. - Fiscal deterioration by group: - Fuel- exporting economies: average deterioration in the overall government balance of just over 10 percentage points in 2009. - Nonfuel commodity exporters: fiscal balances will deteriorate as well, but less than in fuel exporters. - Government balances (figure 1.10): - Government balances are shown for 2008–09 by groups: Nonfuel primary products exporters, Fuel exporters, All other countries (percent of GDP). - Policy tradeoffs and recommended approaches: - Macroeconomic policies should be adapted to country-specific circumstances; no uniform response. - Authorities should: - support economic growth while keeping inflation under control; - strengthen banking system liquidity; - ensure frameworks for prompt resolution of liquidity and solvency problems, especially for systemically important financial institutions; - clarify need for strengthening domestic prudential supervision and market regulation; - prepare contingency plans for sudden stops in capital flows and domestic banking shocks. - With balance of risks shifted from inflation to financial instability and deteriorating growth prospects, many countries have scope for: - monetary easing and discretionary fiscal policies to support domestic demand where inflation is rapidly declining, fiscal balances are sustainable, reserves are strong, and external vulnerabilities are limited. - Fiscal stimulus design: - Prefer temporary tax measures or quick- disbursing public expenditure of a nonrecurrent nature that can be quickly reversed (e.g., increased spending on infrastructure maintenance). - Avoid measures leading to sizable future liabilities that may undermine fiscal sustainability (e.g., large increases in the public wage bill). - Countries facing unsustainable fiscal and current account deficits and reduced access to financing may need to seek further support and adjust policies until domestic activity recovers. ### Commodity-exporters: dealing with increased price volatility (Box 1.3) - 2008 saw marked increases in commodity price volatility; example: standard deviation of rice prices in 2008 more than tripled compared with 2007. - Volatility drivers: deleveraging in advanced economies, concerns about growth prospects and vulnerabilities, supply constraints, and short-term demand inelasticities. - Policy implications and recommendations: - Establishment and expansion of stabilization funds: - Accumulate assets in a stabilization fund based on prudent, relatively low projections of export prices initially; as assets grow, move toward a moving average price path. - Simulation for Nigeria: with a three- year moving average price, a stabilization fund asset level of about 75 percent of 2004 government revenue from oil production would reduce the probability of a forced adjustment of government spending to below 20 percent. - Optimal size of a stabilization fund is sensitive to export price variability; higher recent volatility argues for larger average size. - Timing of build-up should be procyclical-aware: shift to larger buffers should take place during periods of rising commodity prices and economic growth, not during distress. - Use of forward markets and long- term contracts to reduce short- term price risks: - Liquidity of forward markets has grown, especially for crude oil (hedging possible up to seven years) and precious metals, and also some base metals and agricultural commodities. - Higher price volatility increases the optimal size of foreign exchange reserves: - Reserves act similarly to stabilization funds for the broader economy; sharp export price fluctuations imply higher optimal reserves. - Drummond and Dhasmana (2008) found that foreign exchange reserves in almost one-half of 44 commodity- exporting countries in Sub- Saharan Africa were, on average, roughly one- third below optimal levels at end-2007. - Volatility measure: - Volatility is calculated as the index of the annual coefficients of variation (standard deviation/mean) of daily commodity prices; rice calculations use monthly prices (index 1996 = 100). *Source: chAPTER 1, GLOBAL MONITORING REPORT 2009 (IMF).* ### chAPTER 1 ### _gmr - chAPTER 1 ### The international crisis and its immediate impact on developing countries - Total foreign exchange receipts by low- income countries will drop sharply in 2009, causing an additional financing need of at least $25 billion. - Contraction in world trade and sharp declines in financial flows are forcing adjustment, with risks of imposing unacceptable burdens on the poorest. - Many governments face external financing constraints that limit the scope for monetary and fiscal stimulus; maintaining fiscal and debt sustainability is often the priority. ### The importance of an open international trade and exchange system - Export restrictions in 2008 aggravated world market food price increases and undermined confidence in the international trade system. - Emerging measures to raise tax revenue or protect domestic industries, and pressures to curtail cross- border bank lending, could deepen the global recession if adopted widely. - Rapid and substantial progress in opening markets at the multilateral level remains a priority; reinvigorating the Doha Round is urged. ### Policy responses and priorities for countries with varying fundamentals - Countries with limited access to international financing and vulnerable external debt positions may need: - tighter monetary policy, - fiscal deficit reduction, - an exchange rate depreciation to support growth and external viability, - improved expenditure management to protect core spending, including infrastructure and social safety nets. - Countries with sound macroeconomic fundamentals may continue medium- term policies aimed at maintaining stable economic conditions, even amid slowing demand. - Where administrative capacity, data quality, and policy credibility are limited (especially in many low- income countries), policies that prioritize fiscal and debt sustainability while allowing automatic stabilizers to operate are likely to yield more positive growth effects than short- term stimulus measures. ### Support from the international community - The international community must act decisively to support low- income countries, most of which will not be able to address the effects of the international crisis through adjustment alone without assistance. - Urgent increases in official development aid are underscored by the projected $25 billion additional financing need for low- income countries in 2009. ### Maintaining longer-term priorities - The food crisis is not over: food prices remain relatively high compared to the first half of the decade and upward pressures may reappear when the global economy recovers. - Policy makers should plan for enhancing food security through increased investment in agriculture and domestic reforms to develop commercial farming and increase small holder productivity. - Phasing out fuel price subsidies should be a high priority, replacing them with better-targeted social protection schemes to protect the poor and avoid unsustainable fiscal positions and adverse climate objectives. ### Prudential supervision, market regulation, and financial infrastructure - The globalization of financial institutions increases cross-border transmission of severe shocks; a comprehensive approach to prudential supervision and market regulation is needed. - Four dimensions for strengthening financial system robustness: - strengthen the soundness of individual institutions; - solidify contingency planning and crisis management frameworks; - mitigate risks from cross- border exposures and spillovers; - adopt a broader macroeconomic orientation for financial surveillance. - Supervisory priorities: - ensure supervisors have expertise and resources to assess banks’ risk models and conduct stress tests that contemplate low- probability risks; - give equivalent weight to supervision of liquidity risk and solvency risk; - strengthen systemic liquidity frameworks and the central bank’s role as lender of last resort where needed; - monitor nonbank financial institutions and off- balance-sheet items and derivatives. - Strengthen financial infrastructure resilience, including domestic clearing and settlement systems and retail electronic payment systems, especially in countries with less developed financial systems. ### Contingency planning and interventions - Contingency planning and crisis preparedness arrangements need strengthening in light of the current crisis. - Government interventions must be credible in funding and implementation and avoid aggravating market distortions (for example, encouraging banks to lend prematurely or misusing guarantees). ### Social protection and safety nets - Many low- income countries have weak safety nets and limited data on welfare impacts; crises offer opportunities to improve monitoring systems. - Well-targeted and flexible measures are preferable to broad subsidies: - direct income support, - workfare (public works), - food- for- work programs, - expanded conditional cash transfer (CCT) programs where feasible. - About one- third of developing countries increased fuel price subsidies in 2008; these are often cost- ineffective and may be counterproductive over the medium term. - Workfare programs with self-targeting features and credible guarantees can provide timely income support and reduce longer-term costs of risks facing the poor. ### Boxed country examples and specific figures - Box 1.5 highlights sharp declines in foreign exchange resources, dismal growth, deteriorating fiscal balances, and sharp declines in private demand across emerging and developing countries. - Country examples of negative impacts include Tanzania, Kazakhstan, Chile, and Latvia: - For Latvia, the fiscal balance includes estimated bank restructuring costs of 12.4 percent of GDP in 2009. - Box 1.4 reports IMF staff survey findings on the quality of macroeconomic policies in low- income countries, noting improvements in fiscal policy and fiscal transparency up to 2008, but declines in monetary policy and governance in monetary and financial institutions in 2008. *Source: _gmr - chAPTER 1, _gmr - chAPTER 1.* ### chAPTER 1 ### chAPTER 1 ### Financial sector resilience, supervision, and crisis management - National authorities must ensure a robust legal process for early intervention in, and resolution of, failing financial institutions; regulatory authorities need the power to close or restructure a troubled financial institution. - Critical conditions during a financial crisis: a clear hierarchy in decision-making, up-to-date supervisory information, and the ability to act swiftly. - Greater coordination among central banks, financial regulators, and their respective governments, both domestically and on a cross-border basis, would contribute to better monitoring of liquidity and solvency risks. - National authorities must ensure clarity over deposit insurance responsibility and coverage, including for cross-border institutions; coverage must be credible and payouts provided promptly to minimize disruptions in the payments system. ### The Financial Sector Assessment Program (FSAP): framework and findings (Box 1.7) - FSAP is a joint IMF–World Bank program synthesizing a comprehensive view of a country’s financial sector risks, vulnerabilities, and development needs. - Coverage: over two-thirds of countries covered by a first-round FSAP or FSAP update; coverage remains uneven across regions and levels of development, with mainly developing countries covered, but coverage of developing countries is rising. - Assessment framework rests on three pillars: - Macroprudential surveillance and financial stability analysis to monitor macroeconomic and institutional impacts on financial system risks and vulnerabilities. - Financial system supervision and regulation to manage risks, protect market integrity, and provide incentives for strong risk management and good governance. - Financial system infrastructure, including legal infrastructure for finance; systemic liquidity infrastructure (monetary and exchange operations; payments and securities settlement systems; structure of money, exchange, and securities markets); governance and transparency (accounting and auditing framework, market monitoring arrangements, credit reporting systems). - FSAP assessments consider complementarities and trade-offs between financial stability and development, the sequencing and coordination of financial policies, and have been an important tool shaping policy advice during the financial market crisis. - Since August 2007, 21 FSAPs (mostly updates) have taken place, with particular attention to crisis management frameworks, cross-border supervisory cooperation, exposures to subprime-related instruments, and tighter funding conditions. ### Common regulatory and supervisory shortcomings identified in recent FSAP reports (Box 1.8) - Sample: 16 FSAPs and FSAP updates in emerging and developing countries in 2007–08 (countries include Algeria, Botswana, Costa Rica, Croatia, Arab Republic of Egypt, Haiti, Kazakhstan, Lithuania, Moldova, Mongolia, Morocco, Namibia, Sri Lanka, Thailand, Ukraine, WAEMU). - Identified common shortcomings: - Insufficient independence and enforcement powers of supervisory agencies (examples cited: Haiti, Mongolia, WAEMU; resource/operational independence: Lithuania, Namibia, Costa Rica, Kazakhstan). - Insufficient tools to assess borrower creditworthiness and collateral quality (WAEMU; Egypt, Haiti; Haiti, Thailand). - Weak risk management: need for adequate provisioning rules and capital risk weights (Kazakhstan, Morocco, Ukraine); connected-lending and concentration risk regulation (Haiti, Mongolia, WAEMU); consolidated supervision for groups and offshore subsidiaries (Botswana, Costa Rica, Kazakhstan, Namibia, Sri Lanka, Ukraine); weak internal controls (Haiti, Morocco); limited liquidity risk management (Algeria, Kazakhstan, Mongolia). - Limited coordination between bank and nonbank supervisory authorities (Croatia, Ukraine). - Distortionary role of the state in the financial system: weak supervision of state-owned banks and recommendations to scale back government ownership/interference (Algeria, Sri Lanka, Thailand; Botswana, Egypt, Mongolia). - Weak payment and settlement infrastructure. - Insufficient contingency planning: recommended revamping of early remedial actions and bank resolution systems (Costa Rica, Haiti, Kazakhstan, Sri Lanka, Ukraine); initiating formal cross-border crisis management arrangements (Lithuania); clarifying roles in contingency planning (Croatia). - Underdeveloped capital market infrastructure: increase disclosure standards and transparency, simplify legal procedures for listings and bond issuances, establish benchmark yield curve (Algeria, Ukraine, Egypt, Namibia, Botswana). - Limited capacity to assess financial stability: improve financial sector data and analytical capacity, including stress testing (Egypt, Namibia, Ukraine). ### Policy responses implemented during the turmoil (summary from Table 1.4) - Table 1.4 summarizes key measures by country across the following categories: Higher deposit insurance coverage; Other debt guarantee provision; Bank recapitalization; Foreign exchange liquidity support; Domestic liquidity support; Capital controls. - Total counts across the sample: Higher deposit insurance coverage: 21; Other debt guarantee provision: 6; Bank recapitalization: 6; Foreign exchange liquidity support: 15; Domestic liquidity support: 19; Capital controls: 6. - Notes: a. Bank recapitalization not yet implemented in some cases, possibly only as contingency. (Table labeled: Source: IMF. Note: This is a summary of key measures taken by authorities.) ### Need for greater international cooperation and cross-border crisis coordination - Crisis calls for enhanced international policy cooperation among countries with international banks; closer cooperation between home and host supervisors is needed. - For countries with banking systems dominated by foreign-owned banks (noted especially in Eastern and Central Europe and Sub-Saharan Africa), behavior of foreign subsidiaries may depend largely on parent groups abroad—necessitating coordinated inspections, joint risk assessments, and planning for major bank failure. - Recommendation to augment the role of international supervisory colleges for cross-border financial institutions to achieve more effective information exchange. - Close cross-border coordination in crisis management is necessary to forestall beggar-thy-neighbor policies with damaging cross-border spillover effects and market distortions; recent unilateral increases in deposit insurance coverage illustrate how lack of coordination can cause serious spillovers. ### Emphasis on systemic risks and prudential policy implications - Financial surveillance should place greater emphasis on systemic risks and wider implications for economic stability; pay closer attention to sources of financing of domestic credit and macroeconomic implications. - Surveillance should consider composition of private sector credit, impact on external position, and banking system’s ability to absorb shocks from sharp unwinding of external funding—particularly for countries with large foreign ownership components (examples cited: Baltics, Hungary, some Sub-Saharan African countries). - Central banks must have access to institution-specific supervisory information to assess systemic risks, including payments system and emergency liquidity operations. - Regulators must ensure market participants are fully informed of risks inherent in financial products; financial supervisors must ensure capital buffers are commensurate with risks. - Prudential regulations should explicitly counter cyclical tendencies through larger liquidity and capital buffer requirements and dynamic loan loss provisioning to account for under-pricing of risk in upturns. - Authorities must counteract institutions’ tendency to become “too big to fail” or “too connected to fail” to internalize economic costs of financial instability—tools include competition policy, restrictions on activities, or prudential measures (capital requirement or deposit insurance premiums) to protect taxpayers’ interests. ### Capital restrictions as a last resort - Capital restrictions might be unavoidable as a last resort to prevent or mitigate crisis effects. A few emerging countries introduced capital controls and other measures to monitor or limit conversion of domestic currency into foreign exchange (see Table 1.4). - Caution: capital controls typically result in economic distortions harmful for longer-term growth and lose effectiveness quickly as market participants find ways to circumvent them; they may undermine investor confidence. - Conclusion: capital controls may need to be imposed only as a last resort to help mitigate a financial crisis and stabilize macroeconomic developments. ### Poverty effects of the food and financial crises and short- and longer-term outlooks - Between 2005 and 2008, the rise in food prices pushed an estimated 160 million to 200 million people into extreme poverty. - Although international food prices declined since mid-2008, local prices lag, so benefits are not immediately felt; no more than 90 million to 120 million people who had been pushed into poverty by high food prices may emerge from poverty in 2009. - The slowdown from the global financial crisis further increases poverty: on current growth projections, there will be about 55 million more extreme poor (those living below $1.25 a day in 2005 PPP terms) in developing countries in 2009 than expected before the financial crisis. - Projections for 2009: the poverty rate is expected to decline in 2009 by 0.6 percentage point, compared with an average annual decline of 1.3 percentage points in the three-year period preceding 2009. - Table 1.5 (short-term poverty outlook, people below $1.25/day, 2005 PPP) — selected table entries (Number of people in millions; Change in number of people in millions; % of population; Change in percentage points): - East Asia and the Pacific: 2008: 222.5; 2009: 203.0; Change in number: –31.2; 2005–08 a: –19.5; % of population 2008: 11.5; 2009: 10.4; Change (percentage points) 2008–2009: –1.8; 2005–08 a: –1.1 - Europe and Central Asia: 2008: 15.1; 2009: 15.5; Change in number: –0.7; 2005–08 a: 0.4; % of population 2008: 3.2; 2009: 3.3; Change (percentage points) 2008–2009: –0.2; 2005–08 a: 0.1 - Latin America and the Caribbean: 2008: 37.6; 2009: 40.3; Change in number: –2.5; 2005–08 a: 2.7; % of population 2008: 6.6; 2009: 7.0; Change (percentage points) 2008–2009: –0.5; 2005–08 a: 0.4 - Middle East and North Africa: 2008: 8.6; 2009: 8.3; Change in number: –0.8; 2005–08 a: –0.3; % of population 2008: 2.7; 2009: 2.5; Change (percentage points) 2008–2009: –0.3; 2005–08 a: –0.2 - South Asia: 2008: 536.3; 2009: 530.6; Change in number: –19.8; 2005–08 a: –5.7; % of population 2008: 34.8; 2009: 33.9; Change (percentage points) 2008–2009: –1.8; 2005–08 a: –0.9 - Sub-Saharan Africa: 2008: 382.7; 2009: 385.9; Change in number: –1.9; 2005–08 a: 3.2; % of population 2008: 46.7; 2009: 46.0; Change (percentage points) 2008–2009: –1.4; 2005–08 a: 0.7 - Total: 2008: 1,202.8; 2009: 1,183.6; Change in number: –56.9; 2005–08 a: –19.2; % of population 2008: 21.3; 2009: 20.7; Change (percentage points) 2008–2009: –1.3; 2005–08 a: –0.6 - Low-income countries: 2008: 952.3; 2009: 947.8; Change in number: –26.9; 2005–08 a: –4.5; % of population 2008: 38.0; 2009: 37.2; Change (percentage points) 2008–2009: –1.8; 2005–08 a: –0.8 - Middle-income countries: 2008: 262.1; 2009: 247.2; Change in number: –33.1; 2005–08 a: –14.9; % of population 2008: 8.3; 2009: 7.8; Change (percentage points) 2008–2009: –1.2; 2005–08 a: –0.5 - Source: World Bank (model-based projections). Note: PPP = purchasing power parity. a. Simple annual average change for the three-year period 2005–08. - Labor market impacts (ILO estimates): some 30 million more people around the world may be unemployed in 2009 compared with 2007, of which 23 million could be in developing countries; the labor market impact is estimated to be associated with 93 million additional people classified as extreme poor. - Longer-term outlook and MDG prospects: - Current growth projections envisage a gradual recovery in developing country growth starting in 2010; per capita GDP growth in developing countries is expected to rebound to an average of about 4.5 percent per year during 2011–15. - On these projections, the proportion of people living below $1.25 per day is expected to reach 15.1 percent by 2015, surpassing the MDG target of 20.8 percent for developing countries as a whole (table 1.6). - Projections are subject to considerable uncertainty and downside risks stemming from the crisis. - Table 1.6 (longer-term poverty outlook, people below $1.25/day, 2005 PPP) — selected table entries (Number of people in millions; % of population; Over/under MDG): - East Asia & Pacific: 1990: 873.3; 2005: 316.2; 2015: 103.6; % of population 1990: 54.7; 2005: 16.8; 2015: 5.1; Over/under MDG: 22.3 - East Asia & Pacific, excluding China: 1990: 190.1; 2005: 108.5; 2015: 43.5; % of population 1990: 41.3; 2005: 18.7; 2015: 6.7; Over/under MDG: 14.0 - Europe & Central Asia: 1990: 9.1; 2005: 7.3; 2015: 12.8; % of population 1990: 2.0; 2005: 3.7; 2015: 2.7; Over/under MDG: –1.7 - Latin America & the Caribbean: 1990: 49.6; 2005: 45.1; 2015: 33.4; % of population 1990: 11.3; 2005: 8.2; 2015: 5.4; Over/under MDG: 0.3 - Middle East & North Africa: 1990: 9.7; 2005: 11.0; 2015: 6.7; % of population 1990: 4.3; 2005: 3.6; 2015: 1.8; Over/under MDG: 0.4 - South Asia: 1990: 579.2; 2005: 595.6; 2015: 416.1; % of population 1990: 51.7; 2005: 40.3; 2015: 24.5; Over/under MDG: 1.4 - South Asia, excluding India: 1990: 143.7; 2005: 139.8; 2015: 97.7; % of population 1990: 55.3; 2005: 36.6; 2015: 21.2; Over/under MDG: 5.4 - Sub-Saharan Africa: 1990: 295.7; 2005: 388.4; 2015: 352.6; % of population 1990: 65.7; 2005: 50.9; 2015: 36.6; Over/under MDG: –7.8 - Total: 1990: 1,816.6; 2005: 1,373.5; 2015: 925.2; % of population 1990: 41.7; 2005: 25.2; 2015: 15.1; Over/under MDG: 5.7 - Total, excluding China: 1990: 1,133.5; 2005: 1,165.8; 2015: 865.1; % of population 1990: 35.2; 2005: 28.2; 2015: 18.1; Over/under MDG: –0.6 - Low-income countries: 1990: 920.4; 2005: 1,032.9; 2015: 789.3; % of population 1990: 52.8; 2005: 43.5; 2015: 28.0; Over/under MDG: –1.6 - Middle-income countries: 1990: 914.2; 2005: 361.5; 2015: 143.5; % of population 1990: 35.0; 2005: 11.8; 2015: 4.3; Over/under MDG: 13.2 - Source: World Bank (model-based projections). Note: PPP = purchasing power parity. a. The difference in percentage points between the MDG target and the projected poverty rate in 2015. Negative numbers indicate underperformance. *Source: GLOBAL MONITORING REPORT 2009 — chAPTER 1 (excerpts).* ### chAPTER 1 ### chAPTER 1 ### Poverty trends and MDG prospects - The share of people living in extreme poverty will remain well above the MDG target of 28.8 percent in 2015. - Regional prospects: - South Asia will barely meet the MDG target. - East Asia and Pacific has already surpassed the target. - Latin America and the Caribbean is on track. - Middle East and North Africa and Europe and Central Asia are likely to miss the MDG target but started from much lower poverty levels. - Income-group projections: - Low-income countries: poverty rate projected to fall from 52.8 percent to 28.0 percent between 1990 and 2015. - Middle-income countries: poverty rate projected to decline from 35 percent to 4.3 percent. - Considerable variation exists among individual countries within these groupings. - Growth volatility and poverty: - Growth accelerations and decelerations have an asymmetric impact on poverty and human development outcomes: outcomes deteriorate more quickly during growth decelerations than they improve during growth accelerations. - Preventing growth collapses is essential for regions such as Sub-Saharan Africa to attain the MDGs. - Had Africa avoided its growth collapses, its GDP per capita would have grown at 1.7 percent a year instead of 0.7 percent between 1975 and 2005, and it would have been more than 30 percent higher by the end of the period. ### Role of private investment climate for recovery and growth - Economic growth is central to achieving the MDGs; a vigorous private sector is vital for strong and sustainable growth. - Private sector contributions: - Drives job creation, increases in productivity, and economic growth. - Private-sector jobs provide most of the income in developing and developed countries. - Revenues from private sector transactions and incomes pay for many public goods provided by governments. - Competition spurs technological advancements and productivity gains. - Poverty link: - Expansion of job opportunities is identified as the single most important pathway out of poverty. - Empirical point: when average household incomes rise by 2 percent, poverty rates fall by about twice as much on average. - Crisis context: - The international financial crisis has constrained credit availability, causing firms to downsize, lay off workers, and delay or cancel investment plans. - Ensuring the private sector has necessary tools and appropriate fiscal and monetary policies is critical for recovery and growth. - Policy agenda elements assessed: - Regulatory and institutional environment. - Access to financial services. - Access to infrastructure (with the private sector also playing a role in provision). ### Key constraints from Enterprise Surveys - World Bank Enterprise Surveys (over 100 countries) provide subjective rankings and objective measures (e.g., outage frequency, generator costs, production lost). - Firm responses identify three key constraints worldwide: - Regulatory environment. - Access to finance. - Infrastructure. - Patterns by income level (survey summary): - Firms in high-income countries report far fewer constraints; shares reporting major or severe constraints are much lower than in developing countries. - Access to electricity and finance are the top two issues in low-income countries. - Telecommunications is not reported as a major constraint in any income category. - Middle-income country concerns: - Most significant reported areas: tax rates, tax administration, competition from the informal sector, and corruption. - As income rises, formal regulatory procedures and time delays tend to fall, but enforcement often strengthens, potentially explaining why entrepreneurs in middle-income countries report being more constrained by regulation. - Corruption and regulatory constraints may be correlated. - Effects of weak investment climate: - Weaknesses shift firm size distribution downward. - Interruptions in power reduce growth of large firms and encourage more small, labor-intensive firms. - Lack of access to finance lowers growth across firm sizes and disproportionately hurts small firms. ### Regulatory design, enforcement, and market failures - Regulations address market failures such as externalities, information asymmetry, and monopoly power. - Government challenge: correct market failures without overreaching; overregulation can stifle opportunities and curtail growth. - Principle emphasized: - The aim should be better, not necessarily fewer, regulations. - Enforcement quality and broader governance matter greatly for regulatory effectiveness. - Keep regulations simple, transparent, and enforceable. - Risks of heavy regulatory burden in low-capacity settings: - Can produce perverse outcomes, undermining government credibility and effectiveness. ### Doing Business indicators and regulatory reform evidence - Doing Business project benchmarks 10 regulatory areas and shows wide variation across countries. - Empirical findings: - Richer countries tend to have more efficient and streamlined regulations, but with considerable variation. - What matters is quality of regulations, including enforceability, not just number of procedures. - Cross-country improvement data: - Across six years of Doing Business data, 126 of the 178 economies with at least two years of data register an improvement of 10 percent or more in at least one indicator. - Fifty- two countries report such an improvement in more than three indicators. - Only 18 countries report an overall reversal in an indicator. - Regional patterns: - Europe and Central Asia has had a higher share of countries with improving indicators. - Sub-Saharan Africa has had somewhat smaller improvement over time but the majority of countries there saw indicators improve in 2007–08. - Country examples and outcomes: - Three of the world’s top ten economies that reformed business regulations were from Sub-Saharan Africa: Botswana, Burkina Faso, and Senegal. - Mauritius moved up to 24 in the global rankings on regulatory ease of doing business. - South Africa ranked 32 and Botswana ranked 38 among top reformers. - Egypt: six months after reforming its property registry, title registrations increased and related revenue rose by 39 percent. - Oman: commercial registrations increased by 93 percent during the year after implementing a one-stop shop for business start-ups. - Saudi Arabia: reducing minimum capital requirements led to increased registrations (specific figure not provided in supplied text). ### Policy implications and priorities highlighted - Priorities for improving the investment climate: - Focus on better, enforceable regulations rather than fewer regulations per se. - Strengthen enforcement capacity and broader governance to enhance regulatory effectiveness. - Protect infrastructure investment from the impact of the crisis to support short-term recovery and foundations for future growth. - Tackle regulatory costs and strengthen property rights to generate significant increases in investment and productivity. - Pay special attention to the financial sector given the crisis and to ensuring firms have access to finance to support recovery and growth. *GLOBAL MONITORING REPORT 2009, chAPTER 1.* ### chAPTER 2 ### chAPTER 2 ### Subnational indicators and country examples - An expanded number of countries, including China, Mexico, Nigeria, and the Philippines, have developed subnational indicators of regulations, allowing for more tailored messages, improved benchmarking, and easier demonstration of what is feasible within the country. - Mexico: time to enforce a contract varies from 248 days in Zacatecas to 560 days in Quintana Roo. Zacatecas and other states are reducing the backlog by creating specialized commercial courts. Other states are increasingly using electronic platforms to share information and manage cases. - The Dominican Republic was the top small-island reformer in 2008, as well as a top-10 reformer globally. ### Patterns and scope of regulatory reform - With six years of Doing Business data, it is possible to look in to an 81 percent increase in new company registrations. - Figure 2.4 (summary): the share of countries posting an improvement of at least 10 percent, 2003–08, shows: - Most common reforms: starting a business (days), followed by trading across borders (days) and accessing credit (info). - Less common reforms: employing workers (rigidity), closing a business (days), and investor rights (disclosure). - Country characteristics associated with reform: - For six regulatory areas, countries with longer initial times to complete regulatory processes have been more likely to make subsequent reforms. - Low-income countries have been more likely to reform access to credit, construction permits, and disclosure rules. - High-income countries have been relatively more focused on reforms regarding starting a business and employing workers. - Landlocked and small island economies: - Face compounded geographical and bureaucratic regulatory challenges. - Compared with coastal economies, landlocked countries tend to rank lower in starting a business, dealing with construction permits, getting credit, protecting investors, paying taxes, trading across borders, and closing a business. - Overall, landlocked economies have an average ranking of 107 out of 181 economies covered by the global Doing Business 2009 report. ### Evidence that business-environment reforms matter (Box 2.2 — key empirical findings) - Barseghyan (2008): - An increase in entry costs by 80 percent of income per capita (one half of their standard deviation) decreases total factor productivity and output per worker by 22 percent and 29 percent, respectively. - Klapper, Laeven, and Rajan (2006): - The difference in real growth rates of value added per worker between retail and pulp wood industries in the Czech Republic versus Italy is 0.7 percentage points higher; with the average real growth rate in value added per worker at 1 percent, this is sizable. - Chari (2008) — India (1984–90): - When entry costs were cut by approximately 65 percent, the resulting productivity increase was as much as 28 percent over the six years covered, of which 16 percent was directly contributed by the entry reforms. - Bruhn (2008) — Mexico (2002 simplification of entry regulations): - A 5 percent increase in entry in eligible industries. - Employment in eligible industries went up by 2.8 percent. - Results imply competition from new entrants lowered prices by 0.6 percent and decreased the income of incumbent businesses by 3.2 percent. - Little of the entry effect was attributable to informal firms registering; rather, former wage earners opened new businesses. ### Effects of regulations within countries and on firm heterogeneity - Cross-country correlations show that countries with more regulatory burdens often have large informal sectors; onerous regulations can reinforce incentives for firms to remain small and informal. - Improving property rights can reduce uncertainty, encourage transactions, and expand access to credit by strengthening control of collateral. - Compliance and enforcement: - Noncompliance is higher where regulations are more stringent and where enforcement is more lax. - Reducing time and cost of regulations is necessary but insufficient; improving transparency and information availability is also important. - Overcoming the “culture of informality” and improving the quality and fairness of state institutions supports effectiveness of reforms. - Effects on women’s participation: - Enterprise Surveys show participation rates for women as owners in formal firms generally range between 20 and 30 percent of firms. - Participation rates, both as owners and as workers, are generally highest among the smallest firms and in the informal sector. - Evidence suggests that as regulatory burdens fall, women’s participation as entrepreneurs tends to rise. - Effects on firm size: - Small and medium enterprises (10 to 50 employees) are typically most affected by weaknesses in the investment climate. - Microfirms (10 or fewer employees) often stay below regulatory radar to avoid taxation and compliance costs. - Larger firms can often self-provision solutions (generators, foreign partners, retained earnings) and may obtain favorable tax treatments. - Small firms face higher proportional fixed costs and greater difficulties accessing finance; when small firms obtain finance, they benefit the most from it. ### Role of governance, implementation, and enforcement - The associations between changes in Doing Business indicators and economic outcomes are stronger for countries that are well-governed (controlling for income). - Changing de jure regulations has limited impact if there is a large gap between de jure and de facto regulations; better governance increases the credibility of reforms and the likelihood of firm responses. - Enterprise Surveys evidence: - Table 2.1 (selected figures from Enterprise Surveys database): - Management time with officials (percent) and related indicators by income group or region: - Low income: Management time with officials 9.0; Firms that report regulations are interpreted consistently 47.5; Firms that believe courts will uphold property rights 52.25; Firms that make payments to “get things done” 7.5 - Middle income: Management time with officials 10.6; Firms that report regulations are interpreted consistently 40.5; Firms that believe courts will uphold property rights 55.23; Firms that make payments to “get things done” 30.4 - High income: Management time with officials 4.7; Firms that report regulations are interpreted consistently 53.3; Firms that believe courts will uphold property rights 70.9; Firms that make payments to “get things done” 23.0 - East Asia and Pacific: Management time with officials 9.8; Firms that report regulations are interpreted consistently 56.1; Firms that believe courts will uphold property rights 69.44; Firms that make payments to “get things done” 49.6 - Europe and Central Asia: Management time with officials 7.1; Firms that report regulations are interpreted consistently 40.8; Firms that believe courts will uphold property rights 50.3; Firms that make payments to “get things done” 38.3 - Europe high-income: Management time with officials 3.4; Firms that report regulations are interpreted consistently 56.6; Firms that believe courts will uphold property rights 75.0; Firms that make payments to “get things done” 20.7 - Latin America and Caribbean: Management time with officials 13.9; Firms that report regulations are interpreted consistently 34.0; Firms that believe courts will uphold property rights 49.2; Firms that make payments to “get things done” 20.2 - Middle East and North Africa: Management time with officials 11.3; Firms that report regulations are interpreted consistently 47.4; Firms that believe courts will uphold property rights 60.7; Firms that make payments to “get things done” 26.0 - South Asia: Management time with officials 10.8; Firms that report regulations are interpreted consistently 57.5; Firms that believe courts will uphold property rights 52.3; Firms that make payments to “get things done” 72.7 - Sub-Saharan Africa: Management time with officials 7.9; Firms that report regulations are interpreted consistently 42.0; Firms that believe courts will uphold property rights 56.5; Firms that make payments to “get things done” 44.6 - Respondents in middle-income countries were least likely to report that regulations were enforced consistently. - Good governance: - When governance is improved by one standard deviation, infant mortality declines by two-thirds and incomes rise about threefold in the long run. - Improvements in governance have been observed across regions from 1998 to 2007 in areas such as voice and accountability, political stability, regulatory quality, rule of law, and control of corruption. ### Moving regulatory reform forward — priorities and policy recommendations - Three areas of emphasis for future efforts: - Simplifying regulations while ensuring adequate protection of public interests: - The goal is not to remove regulations but to ensure they address underlying public interests. - Streamlining requirements can improve compliance and close loopholes or exceptions that benefit only a few firms. - Setting standards too high can discourage firms from trying to comply. - Strengthening the broader governance and enforcement environment: - Building capacity for enforcement through hiring and training officials can improve enforcement; external assistance can help. - Reforming implementation to reduce discretion in how regulations are applied can lower uncertainty and address firm concerns. - Expanding inclusive public-private dialogue in shaping reform priorities: - Private sector members can identify constraining issues, but their preferences must be weighed against public interests. - Tools like Enterprise Surveys can highlight constraints and variation across actors (by size, location, gender). - Inclusive dialogue helps target reform priorities and better ensure results. *Source: GLOBAL MONITORING REPORT 2009, Chapter 2 (PDF: _gmr - chAPTER 2).* ### chAPTER 2 ### chAPTER 2 ### Financial development and the MDGs - Evidence (country, cross-country, experimental) shows access to financial services contributes significantly to reaching the MDGs through income growth and direct effects on poverty, undernourishment, health, education, and gender equality. - Empirical findings: - If India had increased its average ratio of private credit to GDP from 19.5 percent to 25 percent (the mean value for developing countries), its average real annual GDP per capita growth would have accelerated by an additional 0.6 percentage point per year over the period 1960–95. - A 10 percentage point increase in the private- credit- to- GDP ratio reduces poverty ratios by 2.5 to 3 percentage points. - A 1 percentage point increase in the private- credit- to- GDP ratio has been shown to reduce the prevalence of undernourishment by 0.22–2.45 percentage points. - The ratio of private credit to GDP is around 16 percent in low- income countries compared with 88 percent in high- income countries. - Relative impacts (box 2.4): analysis compares impacts of private credit (% of GDP) and GDP per capita on several MDG indicators in 2015, assuming past growth trends of 1.6 and 1.1 percentage points per year, respectively. ### Financial sector development and private sector / firm growth - Finance is important for investment, domestic and international trade, and other private sector activities; access to finance affects firm growth directly. - Enterprise Surveys and World Business Environment Survey evidence: - SMEs in low- income countries rank finance as an especially high barrier for growth. - Firms identifying finance as a constraint are more likely to experience slow output growth. - Specific financing problems—high interest payments, collateral requirements, bank paperwork and bureaucracy, and bank corruption—significantly constrain firm growth. - Access to finance emerges consistently as one of the most important and robust underlying factors constraining firm growth; lack of finance can make other barriers more binding. - Small firms benefit most from financial development in terms of entry and relaxed growth constraints; at any given level of financial development, smaller firms have more difficulty accessing external finance than larger ones. - Cross- country data show innovation as an important channel: a survey of some 17,000 firms in 47 countries found firms’ use of external finance was significantly associated with more innovation, an effect stronger when access to finance came from foreign banks. ### Dimensions of financial sector development and access patterns - A country’s financial sector development should be assessed on four dimensions—size, access, efficiency, and stability. - Main finding: while the size (depth) of the financial sector has grown in many countries, access generally remains weak. - Access statistics and patterns: - In most of Sub- Saharan Africa, fewer than 20 percent of households have an account in a financial institution. - That figure is less than 50 percent in many other developing countries. - In almost all developing countries in Sub- Saharan Africa, more than 50 percent of firms complain about lack of finance. - Financial depth does not guarantee access: comparisons of household use of financial services with financial depth indicators show a positive but imperfect correlation; economic development does not guarantee access to finance for households. - Nonbank finance remains much less important in most developing countries, though it can improve price and availability of longer-term credit to smaller borrowers; bond finance and external equity require strong investor rights and can lower costs for large firms with spillovers to smaller firms. ### Microfinance: reach and limits - Thirty years after Grameen Bank, microfinance has matured but lacks scale: - Only in eight countries do microfinance borrowers account for more than 2 percent of the population. - In a sample of 124 microfinance institutions (MFIs) in 49 countries representing around half of all microfinance clients around the globe, only half were profitable and self- sustainable. - Targeting: 85 percent of the poorest 93 million MFI clients are women. - Operational characteristics cited for microcredit success include dynamic incentives, repayment in public, forced savings, notional collateral, and targeting of women; some of these have not yet been fully evaluated. - Policy implication: shifting focus to building inclusive financial systems and improving access for all under-served groups is likely to have a greater impact on development outcomes than focusing narrowly on microcredit alone. ### Risks, regulation, and lessons from the subprime mortgage market - Financial sector development carries risks; the recent financial crisis highlights the need for appropriate regulation and supervision to ensure financial system soundness and stability. - Evidence from the U.S. subprime mortgage market: - Rapid expansion accompanied by a decline in credit standards and excessive risk taking; higher delinquency rates and insolvency problems at major mortgage lenders followed. - Analysis of over 50 million individual mortgage applications shows credit expansion led to decreased lending standards (declining denial rates and rising loan- to- income ratios) not explained by fundamentals, and areas with faster application growth experienced sharper increases in delinquency rates. - Changes in market structure (more competitors) correlated with larger declines in denial rates, suggesting local lenders cut standards when facing competition from new entrants. - Lax regulation and supervision, influenced in part by lobbying by subprime firms, contributed to poor lending outcomes. - Although home ownership rose (home ownership ratio hit an all- time high in 2006), the subsequent rise in delinquencies and foreclosures raised questions about the welfare implications of the mortgage credit boom and the opaqueness and risks of complex financial instruments. - Recommendation: design regulation and supervision in developing countries to allow for increased access in a sustainable manner; better assessment of lending quality and overall exposures and risks of the financial system is needed. *Source: GLOBAL MONITORING REPORT 2009, Chapter 2 (_gmr - chAPTER 2).* ### chAPTER 2 ### chAPTER 2 ### Financial access, ownership, and competition - Evidence shows state- owned banks can reduce overall financial sector development, leading to lower efficiency and reduced access to financial services; the performance of state- owned banks in subsidized lending aimed at enhancing access has tended to be poor as well. - Governments with greater checks and balances and better institutional development might be expected to have more positive results from state ownership. - Opening to foreign banks improves access for SMEs by creating competitive pressures; firms in countries with more foreign banks are less likely to rate high interest rates and access to long- term loans as major obstacles. - An analysis of borrowers’ perceptions across 36 countries finds that financing obstacles are lower in countries with higher levels of foreign bank penetration. - Even if internationalization of financial services can introduce more volatility, in the long run the gains in access are significant. Key points on supply and demand mismatches - Supply-side constraints: providers do not target the poor and small firms because of problems of information, high transaction costs, and poor enforcement of contracts. - Demand-side constraints: poor households and smaller firms often lack financial sophistication and literacy, do not trust financial institutions, do not realize their need for financial services, or think products offered are ill suited to their needs. - Technological improvements and competition are broadening the access frontier, evidenced by rapid expansion of specialized microfinance firms. Policy implications and cautions - Providing the private sector with the right incentives and good prudential regulations is key; competition that fosters access can also result in reckless expansion if not accompanied by proper regulatory and supervisory frameworks. - International regulations designed to minimize bank-failure costs should not inadvertently penalize small borrowers. - Direct government interventions can play a role, but experience shows government- owned subsidized credit programs have generally not been successful; partial credit guarantees have been the direct intervention mechanism of choice for SME credit in recent years. - Many government schemes lack thorough economic evaluations; net effects in cost- benefit terms remain unclear. - Political economy constraints: powerful incumbents may block reforms that threaten their interests; defining the access agenda more broadly to include the middle class can help mobilize greater political support. ### Information, legal, and physical infrastructure for financial access - In low- income countries, information infrastructures generally matter most for access, while enforcement of creditor rights is more important in high- income countries. - In relatively underdeveloped institutional environments, procedures enabling individual lenders to recover on debt contracts (for example, those related to collateral) are much more important in boosting bank lending than procedures such as bankruptcy codes that resolve conflicts between multiple claimants. - Institutional reforms that can lower transaction costs include: - Establishing credit registries or issuing individual identification numbers to establish credit histories. - Reducing costs of registering or repossessing collateral. - Introducing legislation to underpin leasing, factoring, electronic finance, and mobile finance. - Encouraging openness and competition, including internationalization of financial services, helps incumbents seek profitable ways to provide services to previously excluded segments and speeds adoption of access- improving technologies. - Achieving full gains from competition and internationalization often requires convergence of regulations and legal and other institutional infrastructure. Key statistics and indicators from figures referenced - Figure 2.9 underscores large deficiencies today in availability of credit information across regions (private credit bureau coverage and credit information index vary greatly by region). ### Infrastructure, growth, and the MDGs - Infrastructure is critical for private sector development and economic growth; electricity and transport play recognized roles in economic activity, yet services in many developing countries remain inadequate. - Infrastructure directly affects MDG 7 (to “halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation”) and indirectly influences most MDGs via household opportunities. - Each year 529,000 women die from childbirth complications; most of these deaths could be prevented through timely access to essential childbirth- related care. - Construction of an all- weather road in Morocco increased school attendance by girls from 28 percent to 68 percent and improved education quality through teacher recruitment and reduced absenteeism. - Every year 1.8 million people die from diarrheal diseases, including cholera; improved water supply reduces diarrheal morbidity by 21 percent, improved sanitation by 37.5 percent. Macro and regional impacts - Raising infrastructure services of all Sub- Saharan countries to the level of the regional leader Mauritius could add 2.2 percentage points to per capita growth. - Catching up to the level in the Republic of Korea would raise economic growth per capita by up to 2.6 percent percentage points per year. - In rural Ethiopia, improvements in access to quality roads increased consumption growth by an estimated 16 percent and reduced poverty by 7 percent. - After upgrading a highway system connecting the four largest cities in India, firms reported fewer transportation obstacles, a reduction in average input inventories by about a week’s worth of production, and greater flexibility in choosing primary input suppliers. Recent financing and remaining gaps - World Bank financing for the infrastructure sectors totaled $33 billion for the 2004–07 period, compared with $22 billion over the preceding four- year period. - Large global infrastructure gaps remain: 1.1 billion people are without safe access to water, 1.6 billion without electricity, 2.4 billion without sanitation, and more than 1 billion without access to telephones. - South Asia and Sub- Saharan Africa confront the largest gaps in essential infrastructure for households and businesses. ### Technology, telecommunications, and Africa’s infrastructure deficit - Technological progress has reduced costs in some infrastructure: installing a satellite telephone cost $60,000 in the mid- 1990s, whereas in 2002 it cost between $2,000 and $4,000. - Mobile usage and information services have increased exponentially in all developing regions; in Africa infrastructure improvements added nearly one percentage point to per capita economic growth between 1990 and 2005, almost entirely attributable to advances in penetration of telecommunication services. - The region with the greatest infrastructure challenge remains Sub- Saharan Africa. Selected statistics on Africa’s widening deficit (Table 2.3, normalized units) - Paved road density: 3 (Sub- Saharan Africa) versus 11 (Other) - Total road density: 3 (Sub- Saharan Africa) versus 7 (Other) - Mainline telephone density: 10 (Sub- Saharan Africa) versus 78 (Other) - Mobile telephone density: 55 (Sub- Saharan Africa) versus 76 (Other) - Internet density: 2 (Sub- Saharan Africa) versus 3 (Other) - Generation capacity: 3 (Sub- Saharan Africa) versus 26 (Other) - Electricity coverage: 16 (Sub- Saharan Africa) versus 41 (Other) - Improved water: 60 (Sub- Saharan Africa) versus 72 (Other) - Improved sanitation: 34 (Sub- Saharan Africa) versus 51 (Other) Additional context on Africa’s infrastructure challenges - Geography and population patterns (low economic density, many landlocked countries) make transport networks and power grids more expensive to build and maintain. - National power systems in 21 of 48 Sub- Saharan countries fall below the minimum efficient scale of 200 megawatts for electricity generation; as a result, operating costs are nearly double those found in the continent’s larger power systems. - In 1970 Sub- Saharan Africa had almost three times as much generating capacity per million people as South Asia; by 2000 South Asia had almost twice the generation capacity per million people as Sub- Saharan Africa. - In 1970 Sub- Saharan Africa had twice the mainline telephone density of South Asia, but by 2000 the two regions had drawn even. *Italic: IMF — GLOBAL MONITORING REPORT 2009, chAPTER 2* ### chAPTER 2 ### _gmr - chAPTER 2 ### Infrastructure gaps and investment needs - Developing countries require around $900 billion each year (7–9 percent of their GDP) both to maintain existing infrastructure and to undertake new projects, yet only half of the required amount is actually spent. - By one estimate, the investment effort implicit in catching up would require as much as 15 percent of GDP in the low- income countries of East and Central Africa. - Trade-off: more money spent on infrastructure means less money for health, education, and other services. - A feasible upgrading of the transnational road network in Sub- Saharan Africa would increase overland trade from $10 billion annually to $30 billion; over a 15- year period the region would gain $250 billion in additional intra- African trade at a cost of $32 billion (upgrade and annual maintenance). - The Africa Infrastructure Country Diagnostic (AICD) finds addressing existing system inefficiencies would almost halve the $10.6 billion in 2003, or 2.6 percent of GDP. ### Impact of inadequate infrastructure on firms and growth - Enterprise Surveys show infrastructure is one of firms’ biggest problems; in African countries the infrastructure constraint on doing business is associated with 40 percent lower firm productivity. - On average, African firms report losing more than 5 percent of their sales as a result of frequent power outages; this rises to 20 percent for informal sector firms unable to afford backup generation facilities. - Businesses in East Asia, South Asia, and Sub- Saharan Africa report numerous power outages per month; a majority of firms in low- income countries generate their own power. - Figure measures (from Enterprise Surveys database): percent of firms with own generator and value lost due to power outage (% of sales) vary widely across countries and regions (examples in text include OECD, East Asia & Pacific, Europe & Central Asia, Latin America & Caribbean, Middle East & North Africa, South Asia, Sub-Saharan Africa, and country examples such as South Africa, China, Brazil, Mexico, Peru, Indonesia, Cameroon, Senegal, Philippines, Kenya, India, Nigeria, Tanzania, Bangladesh, Dominican Republic). ### The lack of financial resources and hidden costs - Estimates of required future spending are large and unmet; financial constraints are a major constraint but not the only challenge. - Three key components of hidden costs affecting infrastructure: - Poor bill collection rates, - Excessive losses from inefficient operations or theft from networks, - Tariffs set below cost-recovery rates. - These hidden costs averaged 4.4 percent of GDP in 2003 in the power sector in Europe and Central Asia, down from double that figure in 2000. - Hidden costs in the gas and water sectors were 1 percent and 1.2 percent of GDP respectively in 2003, with little change since 2000. - In Bangladesh and the Indian state of Orissa, an estimated 45 percent of generated power is lost to technical and commercial inefficiencies. - In Indonesia, the government’s explicit subsidy to PLN reached 1.4 percent of GDP in 2005 (not including additional subsidy from below- cost fuel for generation). ### Tariff underpricing and subsidy design - Underpricing of utility services is not limited to low- income countries; even upper- middle- income countries have significant portions of water services priced too low to cover basic O&M costs. - Table 2.4 (as reported): Water and electricity services are often underpriced — percent - Water tariffs / Electricity tariffs - Country income level - High850083 - Upper-middle3939029 - Lower-middle37222723 - Low8933125 - Subsidies to state- owned enterprises can fill revenue gaps left by low tariffs but often compromise the fiscal position of low- income countries. - On the demand side, price subsidies are often poorly targeted and regressive; smallest consumers (the poorest) receive relatively less of the total subsidy than richest consumers because the richest consume greater quantities. - An in-depth study of 22 cases of quantity-based subsidies in water and electricity across developing regions concluded that not a single case achieved a progressive, or even neutral, subsidy distribution. ### Governance, corruption, and transport inefficiencies - Corruption in infrastructure reduces available funds and returns from investments; infrastructure sectors’ characteristics create opportunities for corruption and concealment. - Construction firms pay considerably more than the average firm in bribes, focusing on bypassing regulation and obtaining government contracts. - One study finds corruption to be the most important explanatory factor behind variation in efficiency among 80 electricity distribution companies in Latin America. - Example: trucking wares from Bamako to a port in Ghana (~2,000 kilometers) costs about $200 in bribes to various officials; the nearly 50 stops delay the journey by almost four hours. - Example: on a 637 kilometer trip from Medan to Meulabooh in Aceh, drivers typically passed through 27 checkpoints and paid a total of $23 in bribes, representing roughly 13 percent of the cost of the trip and more than the wages of those driving the truck. - Findings highlight the governance agenda: strategic medium- and long-term planning, transparent procedures for project identification and implementation, public expenditure reviews, budget tracking, and improved SOE governance and financial management (benchmarking, corporatization, internal governance improvements). ### Closing the financing gap in Sub-Saharan Africa (AICD 2009) - Table 2.5 (annual US$ (billions)): - Financing gap +40 - Reallocate spending across categories –8 - Raise capital budget execution –3 - Reduce operating inefficiencies –3 - Improve cost recovery –4 - Remaining gap +22 ### Private participation in infrastructure (PPI) - Private investment rose in the 1990s, peaking at about $140 billion in 1997; telecommmunications absorbed 46 percent of investment and energy 33 percent. - During 2000–05, sources of infrastructure investment: - 70 percent from governments and state- owned enterprises, - 22 percent from the private sector, - 8 percent from ODA. - In IDA- eligible countries, only 10 percent of infrastructure was funded from the private sector in 2007. - Private investment flows fell after the Latin American and Asian crises and corporate scandals but resurged in recent years; 2007 investment commitments were 10 percent higher in real terms than the previous peak 10 years earlier. - For infrastructure projects reaching financial closure in 1998–2006, institutional investors mobilized about 44 percent of private funds. - Emerging-market ("South- South") investors (Brazil, China, India, Philippines, Russian Federation) have increased their role. - Evidence on efficiency gains from private operators (global study, water and electricity distribution): - 12 percent increase in residential connections for water utilities, - 19 percent increase in residential coverage for sanitation services, - 45 percent increase in electricity bill collection rates, - 11 percent reduction in distribution losses, - Significant improvements in labor productivity. - Table 2.6 (overview of Sub-Saharan Africa PPI experience) — sector highlights: - ICT: Mobile telephony — Over 90 percent of countries have licensed multiple mobile operators; extremely beneficial. Fixed telephony — 60 percent of countries have undergone divestiture of SOE telecom incumbent. - Power: Power generation — 34 IPPs provide 3,000 MW of new capacity investing US$2.5 billion; Power distribution — 16 concessions and 17 management or lease contracts in 24 countries (problematic, one quarter of contracts cancelled before completion). - Transport: Airports — 4 airport concessions, investing